Most every major mortgage finance economist is on record – or will be on record by the end of this week – as saying interest rates will rise in 2015.
And they are probably right. On the conservative side it’s between 4.5-5%, with some outliers thinking it could be as high as 5.3% by the end of 2015.
Of course, keep in mind that last year there was only one notable naysayer on interest rates rising – Capital Economics which predicted no change in 2014. Since it looks like 2014 will end with rates a little lower than the start of 2014, it shows that even when there’s consensus, it’s a good reminder to take every prediction with a grain of salt.
That said, the reasons most economists are giving for believing interest rates will rise in 2015 are on firmer ground, and some of the variables that were in play in 2014 – QM, QRM, tapering, QE – are now locked in place for 2015.
Therefore, barring any major economic upheaval, yes, mortgage interest rates will be gradually climbing.
So that’s one, and it’s really the easy one.
1. Mortgage rates will go up
Interest rates can't stay bound at such low levels. The National Association of Realtors isn't alone in predicting this will happen.
But what about two and three? Have a look.
2. No more hiding the cost of mortgages
Well, these record low interest rates will no longer mask all the mortgage compliance costs arising from all the regulations that came down in 2014 – most especially, but not limited to, the Qualified Mortgage rule.
Total loan production expenses – commissions, compliance, compensation, occupancy, equipment, and other production expenses and corporate allocations – took a giant leap up and increased to $8,025 per loan in the first quarter, up from $6,959 in the fourth quarter of 2013 and $6,368 in the third quarter of 2013.
Low interest rates through 2014 have provided cover for how high these costs have reached. But the leaves will be falling off the trees.
Which naturally leads to the third thing to know.
3. The cost of originating a mortgage is going to continue to be outlandish, and it could directly affect buyer behavior.
Lindsey Piegza, chief economist for Sterne Agee, said it could be challenging for buyers.
“…With housing so ‘affordable’ over the past few years, consumers sense of normal has been adjusted down and when rates do start to rise, there is bound to be some sticker shock and negative reaction,” she said. “In other words, rising rates may cause some homebuyers to assess a new higher rate environment as ‘expensive’ (relative to low rates today) or unreasonably high, deterring new demand.
“But new demand will remain dependent on the consumers ability to pay. Meaning if income growth is keeping up with rising financing costs, consumers are less likely to bat an eye,” Piegza said. “But if financing costs are rising and income growth remains stagnant, consumers are likely to be twice as unlikely to buy a home.”