2016 Mortgage Rate Forecast: A Slow But Steady Climb Ahead?

Freddie Mac, the government-owned corporation that buys and sells mortgage securities, recently issued a mortgage rate forecast for 2016. By their estimation, the average rate for a 30-year fixed home loan could rise steadily between now and the end of 2016, perhaps climbing to 5% by next fall.

This latest rate prediction was part of a broader report issued by Freddie Mac, the “May 2015 U.S. Economic and Housing Market Outlook.” The report also looks at GDP growth, home price appreciation, mortgage loan originations, and other economic factors. But it’s the 2016 forecast for mortgage rates, in particular, that we will focus on here.

2016 Mortgage Rate Forecast Calls for Gradual Rise

The economists at Freddie Mac expect mortgage rates to trend upward through the second half of this year and into 2016. They are also predicting some volatility in long-term interest rates when the Federal Reserve changes its stimulus policy, which could occur in the fall of 2015.

 Where we are now: When this story was published, on May 24, 2015, the average rate for a 30-year fixed mortgage was 3.84%. It has been hovering below 4% all year.

What they expect: According to Freddie Mac’s 2016 mortgage forecast, rates could climb above 4% later this year, and rise steadily toward 5% in 2016. They expect the average rate for a 30-year fixed mortgage to be somewhere around 5.2% by the end of 2016.

Will the Housing Market Falter Under Higher Rates?

How will the housing market change if mortgage rates do in fact rise steadily through 2016? This is the question on the minds of many economists and housing analysts. And with good reason. In the spring and summer of 2013, mortgage rates rose sharply and slowed home sales as a result. Could we see the same pattern later this year?

According to the Chief Economist’s office at Freddie Mac:

“Rising rates and continued house price appreciation will squeeze affordability even in today’s low cost markets. Housing looks strong enough to weather moderately rising rates, but we need real income growth to support home buyer demand.”

The problem is compounded in high-cost real estate markets. In pricier markets, rising home values and interest rates put homeownership that much further out of reach.

‘Significant Volatility’ Starting in the Fall?

For the last few years, the Federal Reserve has kept the federal funds rate near zero percent. (This is the rate banks use when transferring balances to each other overnight.) They’ve done this to increase access to credit and spur the housing market toward recovery.

But now that the housing market and the broader economy are healing, Fed officials are talking about raising the funds rate. This would likely lead to an increase in mortgage rates as well, particularly the long-term rates used for 30-year fixed home loans.

Most analysts expect the Fed to increase rates in the fall of 2015, in conjunction with their September 16 – 17 committee meeting. If that occurs, we could see higher mortgage borrowing costs toward the end of this year and into 2016.

This is partly why Freddie Mac has issued a 2016 mortgage rate forecast calling for steady increases. But it’s not the only reason. Economic growth at home and abroad also play an important role in long-term interest costs.

Purchase Loans to Dominate the Market Next Year

When mortgage rates rise, home refinancing activity tends to taper off. That’s because higher borrowing costs reduce the potential for savings over the long term. So fewer and fewer homeowners are able to refinance successfully. That’s what we could see in 2016, according to the Mortgage Bankers Association (MBA).

In its most recent forecast, released earlier this month, the MBA stated the following:

“For 2016, we expect $791 billion in purchase originations. However, rates will likely continue to rise and cause refinances to decline to $379 billion for a total of $1.17 trillion in origination volume in 2016.”

That’s roughly a 70/30 split between purchase loans and refinance loans, respectively. As a result of this market mix, lenders will likely put most of their efforts (and marketing budgets) into attracting home buyers, as opposed to homeowners.

Disclaimers: This story contains a mortgage rate forecast for 2016, based on Freddie Mac’s analysis. Keep in mind these are only predictions. It’s an educated guess about how mortgage rates might behave in the future, based on current conditions and anticipated events. As a result, these forward-looking statements should not be used for financial planning purposes. They are provided for educational purposes only. Third-party data and commentary included in this story are deemed reliable but not guaranteed; they do not necessarily reflect the views of the publisher.