As of early May 2018, the average US mortgage rate continues to rise to a current rate of 4.58%, which is the highest level since August 2013. Mortgage rates in the US are being driven higher by higher US Treasury yields, rising commodity prices, higher gas prices and a stream of good economic news. Even though borrowing costs are higher than last year, the demand for home buying credit continues to be strong. According to the Mortgage Bankers Association, the latest mortgage applications survey showed that activity was 11% higher than last year.
10 Year Treasury Yield Now at 3%
One of the significant financial factors that is affecting US mortgage rates is the 10-year US Treasury last week reached the psychologically significant level of 3%. This is leaving many financial analysts wondering what the future holds for global asset markets and the overall global economy. With yields exceeding 3% of US 10-year Treasuries, many in the market are expecting higher interest rates form central banks. As a result of higher interest rates, companies will see higher costs when they are borrowing money and will not have as much room to negotiate salaries. As the 10- year note is usually used to set mortgage interest rates, it also can cause people to have less money to spend.
Generally, the rise in rates in 2018 has become rather divisive on Wall Street. Some financial traders and experts see higher rates as a vote of strength on the strength of the US and world economy. The government also noted this week that GDP growth is at an above average 2.3% for the last quarter. The US economy grew at 3% for the previous two quarters, which is quite strong compared with the last decade.
However, others are considering that the higher borrowing costs are a threat to the bull market in global markets that has been fueled by low interest rates for years. But the central bank in the US has been starting to unwind its huge balance sheet and is slowly hiking rates. This is a move that financial traders have said is causing a rise in short term rates.
Higher Mortgage Costs for Buyers
So, now people who are shopping for homes are finding higher mortgage costs. There also is a shortage of homes in many markets that is driving prices higher. It is expected that rising interest rates could erode housing inventories even more as current homeowners are renovating their homes instead of putting them up for sale to avoid a more expensive mortgage that comes with getting another house. Still, even with higher interest rates, homebuyers have been grabbing newly built homes at the higher rates as the economic outlook has been getting better. Sales of new homes in the US rose by 4% in March 2018; this was driven by a surge in buying in the Western US.
If you are finding that current rates and higher prices are pricing you out of the home buying market, what can you do? Here are some options to consider:
FHA May Offer You an Opportunity to Get a Below Market Rate
Even though rates are higher now for various market reasons than last year, you still may be able to get a low rate if you use the FHA mortgage program. This government backed program provides people with lower credit scores the means to buy a home. Because the loan is backed by FHA, rates are often lower than market rates. According to Zillow, as of early May, 2018, rates for FHA mortgages are in the 4.5% range which is slightly lower than conventional rates. One of the biggest advantages of the FHA loan is that you can get into a home in many cases with only a 3.5% down payment. This is a major advantage, especially as home prices continue to rise in most of the country.
There is little doubt that higher interest rates on mortgages are being driven by various US and global economic factors. Generally, the world economy is getting stronger and is being driven by stronger US growth. This is leading to higher interest rates on mortgages. But as long as the US economy continues to be relatively strong, many financial experts think that many Americans will still be able to buy homes. Unemployment is low and wages are rising, after all. If you are thinking of buying soon, it looks as if we are in a long term rising interest rate environment, so you may want to lock in your rate now.