Mortgage Rates to Rise With More Hawkish Fed

But the MBA forecast still holds, as it expects 30-year rates to hit 4% by the end of 2022.

A Mortgage Bankers Association economist said Wednesday that the Fed’s decision to act more aggressively to curb inflation will send long-term rates up, but the increase is already baked into its forecast for mortgage rates over the next 12 months.

MBA Chief Economist Mike Fratantoni said the Fed’s purchases of longer-term Treasuries and mortgage-backed securities have kept mortgage rates lower than they otherwise would have been. However, even with the Fed’s new stance, he said he expects the MBA’s last forecast is still on target, with 30-year rates rising to 4% by the end of 2022. But he also said rates “may be more volatile as the Fed backs away from the market.”

“Although this will lead to a drop in refinances, we expect that the strong economy will support an increase in home sales in 2022,” he said.  

The MBA’s Nov. 22 forecast showed refinances falling 63% from $2.32 trillion this year to $860 billion in 2022. It said it expects purchase originations to rise 7% from $1.61 trillion this year to $1.73 trillion in 2022.

Fratantoni said more than half of the members of Federal Open Market Committee expect three rate hikes in 2022 as their outlook for economic growth has improved, while their forecast for inflation has worsened.

“Inflation is running well above target, and the job market is booming,” he said. “That is why it was no surprise that the Federal Reserve moved to accelerate their taper of Treasury and MBS purchases, and signaled that the first rate hike will be coming sooner rather than later.”

In March, the MBA had forecast 30-year rates would hit 3.6% by the end of this year and 4.5% by the end of 2022. It has eased its forecast for increases over the year, last setting its expectation in its Oct. 17 forecast that it would rise to 3.1% by the end of this year and 4% by the end of 2022. Those forecasts remained in its Nov. 22 forecast.

Fed Chair Jerome Powell said inflation is running well above the Fed’s long-term goal of 2% and will likely continue to do so well into next year. Most members of the committee expect inflation to fall from 5.3% this year to 2.6% next year — “this trajectory is notably higher that projected in September.”

“While the drivers of higher inflation have been predominantly connected to the dislocations caused by the pandemic, price increases have now spread to a broader range of goods and services. Wages have also risen briskly, but thus far, wage growth has not been a major contributor to the elevated levels of inflation,” Powell said.

Jim DuPlessis CUTimes