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Mortgage Rates Dip—Here’s Why You Shouldn’t Bet on Interest Rates Going Much Lower

Posted by: | Posted on: January 29, 2021

Mortgage rates dipped slightly over the past week, as investors sought a safe haven amid volatile markets and concerns about the economy. But the era of persistently falling rates has likely passed, which is bad news for home buyers.

The 30-year fixed-rate mortgage averaged 2.73% for the week ending Jan. 28, down four basis points from the week prior, Freddie Mac reported this week.

The 15-year fixed-rate mortgage fell one basis point to an average of 2.2%, while the 5-year Treasury-indexed hybrid adjustable-rate mortgage held steady at 2.8%.

The slight decrease in rates was a testament to investor activity, according to Realtor.com senior economist George Ratiu.

“With COVID cases still elevated amid the vaccine rollouts, investors remained worried about high unemployment claims, volatile earnings and lingering concerns about the economic outlook from the Federal Reserve,” he said. “The mood kept them funneling funds into mortgage bonds.”

Despite the decline, Ratiu argued that rates will rise this year. If that prediction plays out, what will happen to home sales? It depends on who you ask.

“As we look at 2021, we expect rising mortgage rates to dampen the pace of activity in the next couple of months, as many buyers will be priced out,” Ratiu said. He noted that as the youngest millennials are entering their 30s and the economy is expected to improve from the coronavirus pandemic, both factors that should keep the pace of home sales elevated in the spring and summer.

Others argue that rising interest rates won’t necessarily hurt home sales or prices. “Historically, when mortgage rates rise, existing-home sales don’t necessarily fall,” Mark Fleming, chief economist at title insurer First American, wrote in a recent report.

Fleming examined previous eras where rates were rising. In two cases — the 2005-2006 period and the 1994 period — home sales did fall after interest rates increased. But in the other time periods he examined, home sales actually increased. The difference came down to why rates were rising.

“Rising interest rates reduce house-buying power and affordability, but are often a sign of a strong economy, which increases home buyer demand,” Fleming wrote.

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