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Mortgage Rates Hold Steady after FED Rate Hike, Auto Loan Industry under Pressure

By:
Bob Mason
Updated: Dec 18, 2017, 11:41 UTC

Tepid wage growth, monetary policy normalization and the impact of tax reforms on U.S Treasury yields could begin to eat into disposable incomes for lower household income families.

car loans

The FED lifted rates for the 5th time since the global financial crisis and for the 3rd time this year and, while we saw the latest rate hike have almost no impact on mortgage rates, the cumulative impact on mortgage rates and other variable loan payments, including credit cards and home equity loans, will be felt by lower-income households in particular.

Following the FED’s rate hike last Thursday, a slide in U.S Treasury yields provided some level of comfort for those with variable mortgage rates. According to Freddie Mac’s latest figures, the 30-year mortgage rate slipped from the previous week’s 3.94% to 3.93% last week, while also well sitting below last year’s 4.16%.

In contrast, the mortgage rate for 15-year mortgages held steady at 3.36%, just shy of last year’s 3.37%, while 5-year rates increased from 3.35% to 3.36%, sitting well above last year’s 3.19%.

As far as homeowners and prospective buyers are concerned, the latest rate hike and market sentiment towards the FED’s inflation outlook for next year has left the markets less than convinced that the FED will be able to hike rates 3-times next year, let alone need to take a more hawkish position on monetary policy. For now, it’s priced in and the impact on longer-term mortgage rates has clearly been limited at best.

Adding support to the falling yields ahead of Thursday’s mortgage rates release was concern over the lack of progress on the tax reform bill, which has been particularly influential on U.S Treasury yields in recent weeks.

U.S Treasury yields have been on the rise at the start of this week, with the U.S equity markets having hit fresh highs on Friday on expectations that the tax reform bill will get voted through this week.

So, while there’s been plenty of talk of how mortgage rates have been unaffected by the FED’s continued move towards monetary policy normalization, Freddie Mac’s 30-year fixed mortgage rate history tells a different story.

Looking at annual averages since 2014, before the FED’s first post-GFC rate hike, the annual average mortgage rate stood at 4.17%, before falling to 3.85% in 2015 and 3.65% in 2016. For the current year, the annual mortgage rate is likely to be around the 3.95% level which reflects the normalization process by the FED.

The car industry is under intense pressure

Continuingly tepid wage growth and rising borrowing costs are certainly a bad combination for the U.S economy and for the lower household income families that are likely to also be exposed to sub-prime car loans and more costly credit card rates on a monthly basis.

For now, the good news is that the car industry is under intense pressure, with car loans being offered at particularly attractive rates. This environment is not going to go on forever however and some care is needed in taking on additional obligations, as in the end, the rate hikes will begin to bite, particularly on existing loans and credit card facilities with variable rates. It may be too early to look for fixed rates in place of a variable, but with the monetary policy easing cycle has come to an end, the chances of further declines will be hinged on how the FED progresses through next year. Even the conservative 3 rate hikes will be felt, in spite of tax reforms that are likely to be rolled out this week.

About the Author

Bob Masonauthor

With over 20 years of experience in the finance industry, Bob has been managing regional teams across Europe and Asia and focusing on analytics across both corporate and financial institutions. Currently he is covering developments relating to the financial markets, including currencies, commodities, alternative asset classes, and global equities.

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