When the Federal Reserve raised interest rates in December, people who had been flirting with buying a home worried they might have waited too long.
But worries about rising mortgage rates have been unwarranted. Since the Fed's rate increase, rates on 30-year mortgages have dropped below 4 percent, and many mortgage experts expect them to stay below 4.25 percent this year.
"If the stock market drops another 300 to 400 points some day, mortgage rates might go down another eighth of a percent," said Ken Perlmutter, president of Perl Mortgage of Chicago. He thinks the dip will be short-lived, and rates are about as low as they will go. He's not expecting a return to the 3.5 percent that happened while the U.S. economy was recovering from the 2008 recession, but he's also not anticipating much increase.
Lately, concerns about the global economy and the plunge in the stock market have driven rates on 30-year mortgages below 3.8 percent nationally, said Zillow economist Svenja Gudell. That's about a quarter of a percent under where they were when the Federal Reserve raised interest rates and analysts were warning homebuyers that rising mortgage rates were likely.
The recent drop in rates "surprised a lot of people," said James Bianco, president of Bianco Research. "People expected rates to be up, not down" after the Federal Reserve raised the federal funds rate. Instead, economic data on a slowing global economy has crimped expectations on the U.S. economy and interest rates.
"Nobody thinks inflation is a risk," and rising inflation would prompt interest rates, like mortgages, to rise, Bianco said. Instead, the growing view is that instead of responding to a surge in the economy, the Federal Reserve was simply tweaking rates upward because they'd been ultra-low since the 2008 recession, Bianco said.
"I think the Fed wants to get out of the market manipulation game," he said.
The Fed doesn't control mortgage rates directly, although its view of growth and inflation is an influence. Mortgage rates respond to the outlook for the economy, and particularly the outlook reflected in yields on 10-year Treasury bonds.
When investors get nervous about the economy or the stock market, they pull money out of stocks and put it into bonds. With bonds popular, yields on the bonds dip. That's what happened after the Fed acted in mid-December. The Dow Jones industrial average lost more than 1,000 points — one of the sharpest moves in history for the early part of the year. Mortgage rates took their cue from the bond yields and fell too.
Perlmutter told a client who needs to close on a large mortgage in February that waiting a little while before locking in a rate might save him an eighth of a percent if investors get panicky about the stock market again. "But it's a risk," he said. "It could go the other way."
Fannie Mae economist Mark Palim is estimating a gradual increase in 30-year mortgage rates to 4.2 percent by the end of 2016 — a modest increase that goes along with modest growth in the economy. Fannie Mae economists recently lowered their expectation of GDP growth to just 2.2 percent after previously estimating 2.4 percent.
"The concern is the impact of international markets," he said. "That's been the pattern of the last few years."When investors worried about a European debt crisis, a Greek debt crisis or China's stock market and economy, U.S. stocks dropped as people yanked their money out of the stock market and tucked it into U.S. Treasury bonds for safekeeping, he said. As the money flowed into bonds, the yields on them dropped, and mortgage rates did too.
Still, Palim and many analysts say the trend in rates is likely to be up, but up gradually while the global economy remains lackluster.
While that takes the pressure off potential homebuyers to make a quick move, PNC Bank economist Stuart Hoffman said people with adjustable-rate mortgages might find it worthwhile to convert to fixed-rate mortgages if their existing mortgages will start getting adjustments this year. A May adjustment could be up a half or three-quarters of a percent, he said.