There’s general consensus that mortgage interest rates are going to rise in 2016 after the Federal Open Market Committee announced in December that it is increasing the federal funds rate for the first time since June 2006.
But just how much interest rates are going to increase is a different story.
A new report from Fitch Ratings also posits that interest rates will increase in 2016, but expects that the increase will force lenders to further open the credit box, especially as the refinance volume is likely to “dry up” in a rising rate environment.
Here’s what Fitch thinks interest rates will do in 2016:
“By the end of 2016 Fitch expects mortgage rates to rise by between 25-50 basis points, with the possibility of upside risk emerging as the Fed raises rates to 1.25%. The increase in mortgage rates will incentivize lenders to broaden loan eligibility requirements, as refinance volume is likely to dry up.”
And here are five more housing predictions from Fitch.
1. House prices will experience slow but steady growth
U.S. home prices will grow by 4.5% in 2016 and nominal prices will approach levels reached during the 2006 housing bubble, Fitch Ratings says in its report.
“U.S. prices appear more sustainable than a decade ago. Since then, the country's population has increased by over 20 million people and total gross income is up by roughly 25% in nominal terms,” Fitch writes.
“When adjusted for inflation, U.S. home prices remain more than 20% below their 2006 peak levels,” Fitch continues. “And new home construction in the U.S. is rebounding from its post-crisis lows but remains below long-term historical averages.”
2. Declines are expected in affordability
Continued strong home price growth and upward pressure on mortgage rates are likely to reduce affordability in 2016, particularly in large metropolitan areas in states such as California, where affordability has fallen by more than 20% since 2011, Fitch states in its report.
“California and Texas may experience a softening in their housing markets, though large downturns are unlikely,” Fitch writes. “The fall in commodities prices could also put further downward pressure on Texas home prices.”
Fitch also states that affordability in many other parts of the country remains high, relative to historical averages, but tight credit conditions limit the number of potential buyers.
3. The recovery in mortgage performance will continue
According to Fitch’s report, serious delinquency rates for all private-label non-agency legacy loans have fallen to 2009 levels. And this trend is expected to continue in 2016.
Additionally, Fitch reports that the performance of non-agency securitized loans that were originated after the crisis remains “excellent.” Of the more than 40,000 loans securitized in prime residential mortgage-backed securities since 2010, only four loans have entered the foreclosure process, Fitch said.
Fitch said its expects these trends within legacy and post-crisis pools to continue through 2016, supported by a stable housing market.
4. Mortgage volume will decrease thanks to rising rates and prices
Fitch’s report states that new lending volume is expected to decline 10% in 2016, as high prices and upward interest rate pressure weigh on a recovering market.
Fitch notes that interest rates are still near historic lows, empowering most able borrowers to have refinanced.
“Borrowers who have struggled to access credit in the recent tight underwriting environment may see more opportunities in 2016, as lenders potentially loosen eligibility requirements to compensate for declining refinance volumes,” Fitch writes in its report.
“Fitch expects that overall lending volumes will decline in 2016, although it is possible that US RMBS securitization volume could increase, as credit expansion and a flatter yield curve reduce the incentive for lenders to retain loans on their balance sheets,” Fitch continues.
5. Prepayments will enter a new era, falling below historical averages
Fitch notes that although it is difficult to predict the timing of further interest rate increases with much certainty, interest rates will inevitably increase, which would lead to a “significant slowdown” in prepayments.
“With roughly 70% of RMBS borrowers locked into a low, long-term fixed rate, or an adjustable rate mortgage that has been modified into a fixed rate, the market will likely enter a sustained period where prepayment rates fall below historical averages,” Fitch notes.