- Fixed-rate 30-year prime mortgages were priced at 3.87 percent at the end of 2014 and 3.96 percent in December 2015.
- There's $3.6 trillion invested worldwide with negative interest and $2 trillion in excess capital flooding the U.S. banking system.
- Mortgage rates respond to market pressures -- and for 2015 there was hardly any pressure.
Here we go again. Another year lies ahead and with it the widespread view that mortgage rates will surely climb. After all, the Federal Reserve has started to increase the rate banks pay to borrow funds overnight, and the economy appears stronger. So it seems logical that mortgage rates will follow.
But — just maybe — it’s wise to not jump on the higher-rates bandwagon. Faithful readers will remember our mortgage rate prediction at the start of 2015: while others were forecasting rates of 5 percent and more, we said, “looking at current predictions, the sense here — for what it might be worth — is that 2015 will surprise us all. It’s entirely possible that rates will largely stay where they are and perhaps even fall.”
And that, in a nutshell, is what happened.
Fixed-rate 30-year prime mortgages were priced at 3.87 percent at the end of 2014 and 3.96 percent for the week of Dec. 24, 2015, according to Freddie Mac. During the year the low was 3.59 percent in February while the high was 4.09 percent in July. The February rate was not far from the all-time low, 3.31 percent in 2012.
Let’s once again stir some tea leaves and suggest how the mortgage market will look in the coming year — and why. There are no guarantees, but the reasoning and facts behind the 2015 forecast tell us a lot about what might happen in 2016.
First, we made the argument last year that negative interest in Europe and Asia meant vast amounts of capital were available to underwrite U.S. mortgages. With so much supply and relatively little demand, how could mortgage rates go up?
This turned out to be entirely true — there is some $3.6 trillion invested worldwide with negative interest, and the U.S. banking system is flooded with $2 trillion in excess capital; so it’s not surprising that U.S. mortgage rates remained close to historic lows for the entire year.
Second, economic contraction coupled with warm weather and more high-mileage vehicles have substantially reduced oil demand.
This is a huge problem for energy producers — and a delight for consumers who have watched gas prices tumble throughout much of the year. The result is more disposable spending in an economy where 70 percent of our gross domestic product depends on consumer purchases.
Changing energy production has begun to significantly — and permanently — impact oil pricing.
For instance, we might have as many as 4 million solar-powered homes by 2020, and today almost 10 percent of our energy consumption comes from renewable sources (40 percent in California).
This is good, but we can do much better — Scotland already produces enough energy from wind power to electrify its entire housing stock. Once renewable energy production is in place, there is no incentive to shut it down — the capital expenditure to set it up has been made and the fuel is free.
What’s surprising about renewable energy is that one would logically expect solar and wind installation activity to decline when oil and coal prices are down, but that has not been the case.
According to The Washington Post, “Orders for 2016 solar and wind installations are up sharply from the U.S. to China to the developing economies of Africa and Latin America, all in defiance of stubbornly low prices for coal and natural gas, the industry’s chief competitors.”
Third, in our 2015 projection we noted that the Fed was likely to raise interest rates — but if it did, the impact on mortgage pricing would be minimal. The Fed almost made it through the year without an increase, and when it finally did raise bank rates, not much happened on the mortgage front.
While the Fed sets bank rates by committee, mortgage rates respond to market pressures — and for 2015, there was hardly any pressure to raise rates.
2016 mortgage rate prediction
The Mortgage Bankers Association predicts that mortgage rates in 2016 will hit 4.8 percent while the National Association of Realtors sees mortgages reaching 4.5 percent by the end of the year.
RealtyTrac contributor Peter G. Miller is a syndicated newspaper columnist with OurBroker.com.