The housing market is just around the corner from the new year, and besides an onslaught of new regulations, the year 2014 is also estimated to bring a new high: 5% mortgage rates.
By the end of 2014, Frank Nothaft, chief economist with Freddie Mac, predicts that mortgage rates will approach and perhaps touch 5%, mostly due to the Federal Reserve’s quantitative easing.
At some point the Fed will scale back their bond purchases, Nothaft said, but when they will start and how gradual it will be, is very unclear.
“I do think in the first half of the year they will announce something on tapering, and they will start to pull back. But when you have a big investor like the Fed scale back their purchases, it will lead back to an uptick in yields, which will translate into higher mortgage rates,” Nothaft said.
Personally, Nothaft said he believes that if Janet Yellen is nominated as chairman, one of her first acts will be to get a consensus statement from the Federal Open Market Committee that is as transparent as possible as to what the Fed will do about tapering.
And while mortgage rates will take a hit from the tapering in the beginning, the pull-back will be gradual in order to avoid further volatility, he estimated.
But the true consequence of tapering and 5% rates falls into the hands of the borrowers.
“As rates climb, I see the issue lying in move-up houses,” said Chris Randall, Real Estate Mortgage Network Capital Markets Vice President. “It will be much harder for the family to make the next step as interest rates rise. Supply will be tight and there will be a lot of people trying to make the next step.”
There will be a lot of consolidation across the industry and fewer players and refinance shops in the market, Randall explained.
Overall, Nothaft emphasized that affordability will remain high in most markets, but not in all.
“Even if rates go up to 5%, given the level of house prices and family income, most markets would remain affordable, and the monthly PITI would be below 28%. But high-cost markets are a challenge,” Nothaft said.
Furthermore, if rates do continue to increase, it will reinforce Freddie Mac’s estimate that 2014 will usher in a purchase-driven market, which will be the first time since 2000.
However, Nothaft cautioned that a purchase-driven market will not make up for the lack of refinance volume and predicts $1.4 trillion in primary mortgage originations for 2014.
As a result, Randall said lenders need to drive their purchase business and make sure they are doing things efficiently. Most lenders who have been around awhile and are more prepared will be OK, but those who are not will have difficulties.