6 Percent Mortgage Rates: Coming In 2014?
Current mortgage rates are more than half a percent higher than they were at the beginning of May, and threatening to move higher. Could this be the beginning of the end for ultralow mortgage rates?
To calculate where rates could be headed, the analysis below digs into some historical figures -- and reaches a projection that could startle prospective home buyers and refinance candidates.
How high will mortgage rates go?
Rather than looking at possible extreme outcomes, this model uses one very conservative assumption: that inflation will remain as moderate as it has been over the past five years.
Mortgage lenders choose interest rates that they hope will earn them a premium over inflation. That premium has to cover their expenses and default risk, and if all goes well, earn them a profit. Over the past 40 years, rates on 30-year mortgages have averaged 8.68 percent. With inflation averaging 4.27 percent a year over the same period, this means mortgage lenders have charged an average premium over inflation of 4.41 percent.Fortunately, inflation has been much more tame in recent years than over most of the past 40 years. Over the past five years, inflation has averaged just 1.6 percent annually. Assuming inflation remains under control, applying the long-term average premium for a 30-year mortgage rate to the current inflation rate would yield a "normal" mortgage rate of 6.01 percent. Why are current mortgage rates so far below that? Much of it has to do with the Federal Reserve's efforts to reduce interest rates. If that's been a key factor in keeping mortgage rates below normal levels, then the end of that intervention might trigger a return to a more normal premium over inflation.
When will it happen?The Fed has said that it will likely start adjusting its current interventions when the unemployment rate gets down to 6.5 percent. So how quickly might unemployment get from its current 7.6 percent level to 6.5 percent? At the current rate of growth for the labor force and job market, it would take another 14.2 months before the unemployment rate gets down to 6.5 percent. Right now, that's the most likely estimate for how long the current Fed policies will continue. Even if job growth starts to accelerate, it will still probably be months before unemployment gets down to 6.5 percent.
Select the service that is right for you!COMPARE ALL SERVICES
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV