How Fed hike will affect home mortgages

WASHINGTON — Are mortgage rates going up? With the Federal Reserve having raised its benchmark interest rate last month and signaling the likelihood of additional rate hikes later this year, consumers and businesses will feel it — if not immediately, then over time.

The Fed’s thinking is that the economy is a lot stronger now than it was in the first few years after the Great Recession ended in 2009, when ultra-low rates were needed to sustain growth. With the job market in particular looking robust, the economy is seen as sturdy enough to handle modestly higher loan rates in the coming months and perhaps years.

“We are in a rising interest rate environment,” noted Nariman Behravesh, chief economist at IHS Markit.

Here are some answers on what this could mean for the real estate market:

Q. I’m thinking about buying a house. Are mortgage rates going to march steadily higher?

A. Hard to say. Mortgage rates don’t usually rise in tandem with the Fed’s increases. Sometimes they even move in the opposite direction. Long-term mortgages tend to track the rate on the 10-year Treasury, which, in turn, is influenced by a variety of factors. These include investors’ expectations for future inflation and global demand for U.S. Treasurys.

When inflation is expected to stay low, investors are drawn to Treasurys even if the interest they pay is low, because high returns aren’t needed to offset high inflation. When global markets are in turmoil, nervous investors from around the world often pour money into Treasurys because they’re regarded as ultra-safe. All that buying pressure keeps a lid on Treasury rates.

Last year, for example, when investors worried about weakness in China and about the U.K.’s exit from the European Union, they piled into Treasurys, lowering their yields and reducing mortgage rates.

Since the presidential election, though, the 10-year yield has risen in anticipation that tax cuts, deregulation and increased spending on infrastructure will accelerate the economy and fan inflation. The average rate on a 30-year fixed-rate mortgage has surged to 4.2 percent from last year’s 3.65 percent average.

Q. So does that mean home-loan rates won’t rise much anytime soon?

A. Not necessarily. Inflation is nearing the Fed’s 2 percent target. The global economy is improving, which means that fewer international investors are buying Treasurys as a safe haven. And with two more Fed rate hikes expected later this year, the rate on the 10-year note could rise over time — and so, by extension, would mortgage rates.

It’s just hard to say when.

Behravesh forecasts that the average 30-year mortgage rate will reach 4.5 percent to 4.75 percent by year’s end, up sharply from last year. But for perspective, keep in mind: Before the 2008 financial crisis, mortgage rates never fell below 5 percent.

“Rates are still incredibly low,” Behravesh said.

Even if the Fed raises its benchmark short-term rate twice more this year, as it forecast on Wednesday that it would, its key rate would remain below 1.5 percent.

“That’s still in the basement,” Behravesh said.

Q. Why is the Fed raising rates? Is it trying to slam the brakes on economic growth?

A. No. The rate hikes are intended to withdraw the stimulus provided by ultra-low borrowing costs, which remained in place for seven years beginning in December 2008, when the Fed cut its short-term rate to near zero. The Fed acted in the midst of the Great Recession to spur borrowing, spending and investing.

The Fed’s first two hikes — in December 2015 and a year later — appear to have had no negative effect on the economy. But that could change as rates march higher.

Still, Fed Chair Janet Yellen has said policymakers intend to prevent the economy from growing so fast as to boost inflation. If successful, the Fed’s hikes could actually sustain growth by preventing inflation from rising out of control and forcing the central bank to have to raise rates too fast. Doing so would risk triggering a recession.