Federal Reserve Board Chairwoman Janet Yellen testifies before the Senate Banking, Housing and Urban Affairs Committee February 14, 2017 in Washington, DC. Yellen testified on the topic of on "The Semiannual Monetary Policy Report to Congress."
Win McNamee—Getty Images
By Taylor Tepper
March 14, 2017

Long before Federal Reserve policymakers begin gathering in Washington today to debate what to do with interest rates, mortgage rates throughout the country have been heating up.

Borrowing rates on 30-year fixed-rate mortgages have climbed to 4.21%. That’s up from 4.09% in January and 3.54% in November, a month before the Fed last hiked short-term rates.

The Fed is all-but-certain to hike short-term rates once again — by a quarter of a percentage point after its two-meeting ends Wednesday afternoon. This should keep the central bank on track for three rate increases by year end, which is what policymakers have recently been hinting at.

Why mortgage rates have been climbing
“Anticipation that the Fed will continue to raise short term rates is one of the factors driving higher mortgage rates, along with overall economic improvement. The two are reenforcing each other,” says Danielle Hale, managing director of housing research at the National Association of Realtors.

Federal Reserve Chair Janet Yellen’s confidence in the economy is clearly mirrored by investors, who are pulling money out of slow-growing Treasury bonds and piling instead into faster-growing but higher-risk stocks in order to reap the rewards of increased growth.

Since bond prices move in the opposite direction of interest rates, falling bond prices have led to rising yields — and higher interest rates. The yield on 10-year Treasury securities, which influence mortgage rates, has jumped to 2.6%, up from 2.3% in February and 1.8% last November.

Why Mortgage Rates Will Keep Going Up
NAR’s Hale expects mortgage rates to increase to 4.4% in 2017, and “that might even be a tad low.”

After years of speculation the economy finally appears strong enough to sustain multiple rate hikes in a calendar year.

You’ll recall that vice chair Stanley Fischer talked about four rate increases in 2016, but that was before stocks plunged thanks to global economic weakness and low demand for oil prices.

The nation’s central bank likely feels comfortable doing so now since the economy has continued its post-recession progress without the typical winter swoon that’s marred the beginnings of the past few years.

Employers have added a monthly average 209,000 jobs over the past three months, according to the Bureau of Labor Statistics, while hourly earnings have perked up, too.

Why Mortgages are Still Relatively Cheap
For much of the past eight years or so, says Trulia’s Chief Economist Ralph McLaughlin, mortgage rates have moved based on the demand of private investors as the Fed held short-term rates unchanged. Now the Fed its stance.

But recent upticks in mortgage rates need to be kept in perspective. While it’s true that mortgage rates are up from historic lows, they’re still much cheaper than in recent history.

For instance rates were 5.5% in March 2004, before the housing mania went truly insane, and 7.7% ten years before that.

“Big picture rates are still pretty low and that’s good news for homebuyers,” says Trulia’s Chief Economist Ralph McLaughlin.

 

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