Since the inauguration of Donald J. Trump, the stock market has seen little
volatility in its rally to record highs. However, now that the Dow has
jumped above 20,000 for the first time in history, what will it mean for
As the economic outlook is improving and markets continue their bull run,
the growing confidence in the economy could indicate rising mortgage rates
in the coming months. If the economy begins growing at a faster pace,
it could add greater pressure to increase lending rates. Although the
demand for home loans may increase, a rise in interest rates could put
a damper on the performance of the mortgage market.
As stocks rise, more investors move their money out of bond positions and
into stocks. When the bond prices fall, their yield increases. These bond
yields dictate much of the conventional mortgage rates across the country.
The 10-year Treasury bond yield provides the benchmark for 30-year mortgage
rates, and the 10-year rate had been below two percent for nearly all
of 2016. After the inauguration, the rate rose above 2.5%, a peak not
seen in almost three years.
How long the bull market will continue is anyone’s guess, but many
economists believe the Dow could rise as high as 30,000 or more during
President Trump’s first term. A lengthy bull run could set the table
for the Federal Reserve to make additional increases to the federal funds
rate, which would lead to a hike in interest rates for everything from
credit cards to auto loans, and of course, mortgages. In December, the
Federal Reserve raised the funds rate for just the second time in ten
years, leading many economists to believe increases will continue throughout 2017.
For mortgages, the record Dow will have an affect on rates, though the
mortgage rates tend to be less volatile than the 10-year Treasury. However,
additional Fed increases could have a severe impact on mortgage affordability.
Over the past 90 days, the 10-year Treasury yield has risen 40%, yet mortgage
rates have only increased 15.5 percent. Borrowers – both homebuyers
and homeowners - will tend to wait for a home loan until they see a drop
in the market or hear that rates are trending downward.
According to the Mortgage Bankers Association, mortgage origination volume
is expected to fall to $1.57 trillion during 2017, from approximately
$1.89 trillion in 2016. The drop in production will have an adverse affect
on mortgage lenders whose stock value is primarily determined by their
origination volume. A drop in stock price could also be in store for third-party
mortgage vendors, such as title companies and escrow service providers
who rely on new originations to fund their operations.
It is not all bad news for the mortgage industry, however, as an improved
economy is likely to fend off a decline in housing values. Even as affordability
issues will persist, there should be an increase of first-time homebuyers
who feel optimistic about their economic future. As rates continue to
rise on mortgages, interest rates on a 30-year mortgage still remain near
Another factor affecting the mortgage market will be the changing demographics
of the nation. As more and more aging Baby Boomers enter into retirement,
Millennials will be just entering their prime home-buying years. Stronger
home appreciation will increase the wealth of Baby Boomers and may force
new homebuyers to get in sooner, while they can lock in more perceived
According to Pulsenomics founder, Terry Loebs, most industry experts expect
stronger home value appreciation this year and next year, as inventory
continues to shrink. Pulsenomics and Zillow conducted its quarterly Home
Price Expectations Survey, where they asked 100 housing experts and economists
to share their views on what they believe would have the greatest impact
on the housing market this year. Over half of the respondents said that
increasing mortgage rates would affect housing affordability and would
be “the most significant driving force in 2017.”
With over 77 percent of Americans using mortgages to purchase their home,
interest rate increases will have a dramatic affect on a vast majority
of homebuyers. However, with increased property values and shifting demographics,
it is yet to be determined just how big an affect increased rates will
have on the overall American housing market.
According to Trulia’s Chief Economist Ralph McLaughlin, homebuyers
may rush into obtaining a mortgage as rates begin to climb. He also stated
that the interest rate increases is just one factor in determining market
conditions and that the increases will not necessarily be a “dealbreaker.”
Mortgage lenders must keep in mind that rates are still at historic lows.
McLaughlin indicates that the national interest rate would have to rise
above 9 percent before renting would become a better alternative to buying.
Even in the most expensive real estate markets in the nation, rates would
have to grow above 5 percent for it to have the same affect.
While some homebuyers may take a wait-and-see approach to obtaining a mortgage,
the rise in rates should build some healthy competition among banks and
other lenders. There will always be borrowers looking for mortgages. However,
the new challenge for mortgage companies this year will be to increase
the diversity of their product offerings, and to improve their marketing
capabilities in an attempt to traverse an evolving mortgage environment.