- When Democrats won Senate control in Georgia’s January run-off election, mortgage rates increased.
- With the majority in the House and now the Senate held by the president-elect’s party, the Biden administration now has a clearer path to passing its proposed agenda items.
- Thanks to an increase in government spending, further stimulus relief, and the rollout of the COVID-19 vaccine, rates on 30-year fixed mortgages are expected to rise, rounding out between 3.2% and 3.4% by the end of the year after dipping to historic lows well below 3% in 2020.
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Rates on 30-year fixed-rate mortgages increased following the Democrats’ two-seat Senate victory in Georgia in early January.
As votes were tallied late into the night, Raphael Warnock and Jon Ossoff looked poised to win their races, handing control of the Senate to Democrats. Because the House of Representatives already has a Democratic majority, it was a sign that the party was likely to control all of Congress.
And average 30-year fixed mortgage rates climbed as a result — from 2.78% on January 5 to 2.85% on January 6, Yahoo Finance reported, per Mortgage News Daily’s survey of lenders. The following day, the rate inched up further, to 2.86%, and the 10-year Treasury yield climbed above 1% for the first time since March.
President-elect Joe Biden’s January 20 inauguration ushers in at least two years of full Democrat oversight of the White House and Congress, investors expect more government spending and stimulus packages to boost the pandemic-ravaged economy. Those, in turn, are likely to result in an increase in yields which usually indicates that mortgage rates will follow, Forbes Advisor reported.
Mortgage rates were slated to go up even before both seats in Georgia were flipped blue, with experts predicting that the 30-year fixed rate will round out between 3.2% and 3.4% by the end of the year.
Here’s the outlook for 2021 — and how we got to this point from 2020’s mortgage rates, which hit historic lows well below 3%.
In 2021, mortgage rates will continue to rise
Even before the Democrats won control of Congress, economists anticipated a jump in mortgage rates through 2021 as COVID-19 vaccines began rolling out. But because the Fed is planning to keep the federal funds rate low, the increase is expected to be slight.
Forbes reported that The Mortgage Bankers Association projects the 30-year fixed mortgage will hit around 3.2% by the end of the year while Money reported it could reach 3.4%.
Now that Democrats run the White House and the Capitol, that forecast seems to be even more likely.
When a party takes control of Congress, it is a tell-tale sign that spending will increase because the administration’s proposals have a better chance of being passed. This serves as a catalyst for more Treasury debt, which in turn results in higher rates.
“While the additional spending may or may not have the intended effect down the road, there is an objective reaction in the bond market any time it needs to account for increased Treasury debt. Simply put, more Treasury issuance = higher rates, all other things being equal,” Matthew Graham, chief operating officer of Mortgage News Daily, wrote in early January.
Mortgage rates hit historic lows in 2020
To be sure, the low mortgage rates of the pandemic era have led to a busy refinancing market and have aided people taking out loans to buy homes. But a return to mortgage rates slightly above 3% may not move the needle too much — they will still be considerably low.
Mortgage giant and government-sponsored enterprise Freddie Mac reported survey-low mortgage rates 16 times in 2020, according to a December report by HousingWire.
And while rates have gone down across the board, interest was especially keen in the behavior of the most popular mortgage product: the 30-year fixed rate, which dropped below 3% for the first time ever in the summer of 2020, per Freddie Mac.
To put the drops into perspective in the beginning of January 2020, per Freddie Mac, the average 30-year fixed rate was 3.72%. By December 2020, the 30-year fixed mortgage rate was 2.67%.
The causes of 2020’s low mortgage rates
In March, to help stabilize the economy, the Federal Reserve lowered the federal funds rate to between 0% and 0.25%.
The federal funds rate is the interest rate banks used to lend money to each other. Lower rates in bank-to-bank trades also result in lower rates among bank-to-consumer lending — like mortgages.
The Fed plans to keep rates near zero until at least 2022 to keep the economy recovering from the coronavirus pandemic.
In addition, the Fed announced a $700 billion quantitative easing program in March.
That $700 billion has been allocated toward the purchase of $500 billion in Treasury securities and $200 billion in mortgage-backed securities, as reported by the Motley Fool. In November, Bloomberg reported that since March, the Fed has purchased up to $1 trillion of mortgage bonds.
The stimulation of the bond market has allowed the housing sector to remain strong. That paired with a volatile stock market has pushed up investor confidence in the mortgage bonds, lowering yields and interest rates.
So while mortgage rates may be starting their climb from 2.67% and may end 2020 above 3%, the increase is likely to be gradual as the economy continues to stabilize from the pandemic..
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