Mortgage Rates in 2015: A Year of Fear and Loathing
- It was expected that 2015 would be the year when mortgage interest rates moved appreciably higher after years of near record lows. But that has not yet happened and may not this year.
- International events and sinking energy prices are combining to keep just enough uncertainty in the market to prevent the Fed from confidently raising rates.
2015 was supposed to be the year that U.S. interest rates finally moved decisively higher, after more than half a decade at historic lows. And it was supposed to be the year that near record-low mortgage interest rates rose, too, finally putting at least one legacy of the financial crisis and recession in the rearview mirror.
In both regards, 2015 hasn’t lived up to the hype.
The so-called “taper tantrum” of June 2013 – a period of rapid interest rate appreciation immediately following rumors of an impending Federal Reserve rate hike – may have been the opening act of the high-stakes drama surrounding the conclusion of the Fed’s recession-era policies. But it was the September 2014 publication of the “Policy Normalization Principles and Plans” – a document outlining how the Fed would raise interest rates when it was deemed appropriate – that marked the start of of the widely anticipated second act: The beginning of the end, when interest rates would finally begin to rise.
But, as the saying goes, time makes fools of us all. Interest rates remain below where they were a year ago. A week after the publication of the Fed’s “policy normalization” plans, interest rates began a month-long slide, taking the prime 30-year, fixed mortgage rate from 4.21 percent down to 3.84 percent. The 30-year, fixed mortgage rate has not breached that 4.21 percent threshold since, and has only briefly risen above the psychologically important 4 percent mark. Thus far, the second act of the Fed’s policy normalization has proven more encore than denouement.
So, what happened? Why have interest rates continued their slide despite the official end of the Fed’s bond buying program and the approach of long-looming interest rate hikes?
Domestic Tranquility, International Turmoil
The simple explanation is that a (mostly) unexpected sequence of global events over the past year have repeatedly pushed interest rates back down, moving expectations for the first rate hike further into the future each time they have begun to move upward (figure 1). These events broadly fit into three groups:
- Concerns about global growth, particularly in Europe and East Asia (and policy responses to these concerns).
- A shift in global energy market supply and demand dynamics.
- Expectations about how these international developments will spill over into the U.S. economy.
Starting last fall, markets have become increasingly concerned regarding the growth prospects of global economies (other than the United States), particularly in Europe and East Asia, pushing some international capital flows away from these countries and often toward “safe” U.S. assets. Since then, these early concerns have materialized, culminating with the start of a European quantitative easing program (announced in January and launched in March). Other related events were less anticipated, but no less impactful, including the devaluation of the Swiss Franc in January and the turmoil surrounding Greek debt negotiations in June and July.
More recently, the August devaluation of the Chinese yuan and associated stock market crash has also contributed to a new round of financial market flight to quality. However, it has also raised the specter of lower inflation pressures in the U.S. Since the Fed would like to be confident that inflation is on firm footing before raising interest rates, turmoil in the Chinese financial market has contributed to pushing back expectations for the first Fed rate hike.
Not entirely unrelated has been a perceived shift in global energy market supply and demand dynamics. With the advent of new production techniques expanding proven petroleum reserves, oil prices have declined to decade lows. There are many potential implications of this shift. Previously, Zillow analyzed the possible effect on local housing markets in parts of the United States where the energy sector accounts for a large portion of employment. For financial markets, a critical result is also the pass through to U.S. consumer prices and inflation.
Overall, this sequence of unexpected global developments has led to the very real possibility that U.S. mortgage rates could end 2015 not far from where they started it – a stark contrast from expectations a year ago that they would be anywhere from 50 to 100 basis points higher.