A combination of factors, including the results of last week’s senate runoff elections in Georgia that gave control of all three branches of the government to Democrats, have propelled mortgage rates to their highest level since mid-November since the start of the year. This rapid uptick has unnerved some home shoppers, particularly those at the entry level who currently face a hotly competitive market in which prices are rising at their fastest pace in decades, but the broader context is important. Despite the uptick in the past week, mortgage rates remain historically low, and while there is now more upward pressure on rates than there has been in some time, a prolonged spike is far from inevitable and rates have leveled off in recent days. As has been the case for months, the path forward for both mortgage rates and the broader economy, will be dictated by improvements in the job market and our ability to contain and treat COVID-19. Absent meaningful progress on those fronts, there remains a limit to how much higher mortgage rates will head in the near future.
One reason why mortgage rates are so low – and appear likely to stay so – is the aggressive approach taken by the Federal Reserve in setting policies aimed at helping the economy through this pandemic-driven recession. Beginning in the spring, the Fed took a series of unprecedented steps in order to ensure money could continue to move through the economy. These aggressive policies – especially the central bank’s program of purchasing mortgage-backed securities and other assets – have placed significant downward pressure on mortgage rates in recent months. Some Fed officials had hinted that the pace of these purchases may slow later this year as the economy improves. But this week, Fed Chair Jerome Powell declared that any talk of tapering the Fed’s asset purchase program was premature until the economy shows much more meaningful improvements. This approach should keep downward pressure on interest rates (including mortgage rates) for the coming months.
Another cause for a limited upward movement in mortgage rates is the fact that the economy is clearly still struggling, and even slowing at an increasing rate over the past few months, as a result of the surge in COVID-19 case volume around the country. Following last week’s disappointing December jobs report, an uptick in the number of people filing claims for unemployment benefits suggests that layoffs continue to increase as a result of the surging pandemic. More than 1 million claims for state (traditional) unemployment benefits were filed in the week ending January 8 – the first time that’s occurred since July. The spread of the virus is also having a clear impact on retail sales activity, a crucial engine for economic activity and growth. December’s 0.7% monthly decrease in retail sales followed a 1.4% monthly decline in November and a 0.1% reduction in October. Retail sales are up year-over-year and have recovered to pre-pandemic levels, but a third straight monthly decline is an unmistakable sign of weakness and suggests that hiring may not recover for months. The January pullback in consumer sentiment echoed the notion that consumer activity is waning as the year begins.
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