by Holden Lewis | NerdWallet.com
Mortgage rates can be volatile in June. One of those graphs may resemble the biting part of a handsaw, with sharp daily fluctuations. I anticipate that the average rate on a 30-year mortgage will be higher in the last week of June than the last week of May.
I am not filled with confidence in this forecast. One source of uncertainty arises in the middle of the month, when the Federal Reserve meets to hash out monetary policy. By the end of May, financial markets were expecting the Fed to raise the federal funds rate by half a percent overnight on June 15.
Experience tells you that when the Fed raises short-term interest rates, long-term mortgage rates will also increase. But when the stock market beats (which happened in May), that tends to lower mortgage rates. What if investors worry that the Fed’s aggressive rate hike will soon lead to a recession? In that case, mortgage rates may not rise much, or they may even fall.
In short: Mortgage rates may rise in June, but that’s not a sure thing. Meanwhile, we could see enough bumps and falls from day to day.
Mortgage rates were relatively calm from autumn 2020 to mid-December 2021. A graph of rates during that period would be a more or less straight line with small shaking from day to day and week to week.
Government intervention was responsible for that era of stable mortgage rates. The Federal Reserve accomplished this by buying billions of dollars worth of mortgage-backed securities each month. This meant that lenders knew they could easily find investors to buy the mortgages they wrote: If private investors didn’t want them, the Fed would buy them.
Lenders keep rates low and stable during this time, knowing that they can easily find buyers for their loans. But the peace period came to an end when the Fed announced in mid-December that it would quickly reduce its purchases of mortgage-backed securities at the start of the new year. Lenders didn’t wait until January for the Fed to follow through; He raised mortgage rates in late December, and continued to raise rates in the spring.
Then, in January, the Fed announced it would put even more brakes on mortgages in February. In March the Fed said it would no longer increase its mortgage holdings. Mortgage rates continued to rise.
entering fluctuating rates
The central bank has amassed hundreds of billions of dollars worth of mortgage-backed securities since the start of the pandemic. In May, it promised to start reducing those holdings in June. The Fed plans to reduce the amount of mortgage-backed securities to $17.5 billion per month from June to August, then to $35 billion a month thereafter.
This means the government is reversing its intervention in mortgage markets. Instead of adding mortgage-backed securities to its balance sheet, the Fed is letting them expire. While the Fed was pledging, rates remained low and stable. Now that the Fed is pledging, it is reasonable to expect that rates will trend upward, and there will be large day-to-day and week-to-week fluctuations.
This volatility will add to the stress when deciding whether to lock in a mortgage rate today or wait until tomorrow. Time-honored advice is to “lock on the dips” – to lock in on the day the rate falls, on the theory that it will rise again soon. Your loan officer can provide guidance, but keep in mind that day-to-day rate fluctuations are unpredictable.
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Holden Lewis writes for NerdWallet. Email: [email protected] Twitter: @HoldenL.