Will Rising Rates Threaten Home Price Gains

Mortgage and Lending with Atlantic Home Loans 12937


The following is the latest analysis written by our head of capital markets.  The primary takeaway is we are squarely in a rising rate environment.  Our projection for 2018 is for rates to top out in the high 4% range, while these levels will remain supportive of the housing market, it will certainly put a damper on future price gains.  If you are seriously in the market to purchase a home, then the time is now, we anticipate the most servere rate increases in the middle and second half of the year.  The good news is you should be able to lock into a 30 year fixed rate in the mid-4% range through the spring home buyinging market.

Yesterday, the FOMC announced no change in rates and telegraphed a likely rate hike in March with two additional hikes this year.   Over the past few years, that might have produced some stability in the fixed income market.  Unfortunately, the environment is changing and fixed rate securities continue to lose ground as rates rise.  As of the writing of this document, the yield on the 10 year note is 2.79%  

There are several factors influencing the market:

  •          The new tax legislation is projected to increase the Federal Budget Deficit.   There are weekly, Monthly and Quarterly auctions of US Treasury debt and the market knows that extra supply is coming.   The unknown is how much supply.  Markets will likely be volatile as the Treasury Department re-calibrates  supply throughout the year.
  •          Commodity prices, particularly Oil, have started to rise.  The Federal Reserve made mention of a heightened expectation of higher inflation this year in their statement. 
  •          Employment trends continue to be positive and with unemployment near all time lows, wage inflation is a real possibility in the future.
  •          Hints of reductions to quantitative easing in Europe are fueling additional fears that European debt will compete for portfolio managers attention sooner rather than later. 
  •          The Fed has been the largest buyer of US Treasury and Mortgage Backed Securities over the past 9 years.  As the Fed reduces their re-investment into those securities, it is unknown what yield levels will be required to meet the supply of bonds in the market.

The good news is that mortgage rates in the middle 4% area continue to be substantially lower  than 2007 levels in the low 6% area before all the housing related trouble began.    As always, consumers should be aware that markets are live and that rates can change throughout the day.

 Daniel P. Spiegel

Capital Markets

Atlantic Home Loans Inc.



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