With the Income You Need to Buy a Median-Priced Home rising, you may need to Learn About Adjustable Rate Mortgages to preserve affordability.

With the Income You Need to Buy a Median-Priced Home rising, you may need to Learn About Adjustable Rate Mortgages to preserve affordability.

Report Card 2019: How Experts Did Predicting Mortgage Rates

upscale-homeAny student knows it can be constructive to look back and review your grades from the past year or semester. The same can be true of mortgage rate predictions. Experts offered mortgage rate forecasts in late 2018. But the actual mortgage rates we got in 2019 were, in most cases, a lot lower than expected.

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Mortgage rate predictions: what happened?

Truth is, it's hard to accurately predict mortgage interest rates. But the fact that the experts were so off in their forecasts a year ago begs new questions. What factors caused rates to drop more than anticipated? And how much stock should borrowers put into mortgage rate predictions?

For answers and guidance, we reached out to a few real estate industry pros.

2019 mortgage rate forecasts from the experts

In late 2018, the following top housing authorities predicted the following average rates for the 30-year fixed-rate mortgage in 2019:

  • Fannie Mae: 4.8%
  • Freddie Mac: 5.1%
  • Mortgage Bankers Association: 5.0%
  • National Association of Home Builders: 5.2%*
  • National Association of Realtors: 5.3%
  • Realtor.com: 5.5%
  • Average of all experts: 5.15%

*Source: Robert Dietz, NAHB

What actually happened is that mortgage rates began 2019 at approximately 4.75%. They had dipped below 4% by May. And some mortgage interest rates plunged below 3.5% in September. Then, they edged up slightly - as of mid-December, mortgage rates hovered just below 3.7%. That means the 30-year fixed-rate mortgage will likely end 2019 about 150 basis points (1.5 percentage points) lower than most of the experts predicted a year ago. That's quite a disconnect by most experts.

Related: What Affects Mortgage Refinance Rates?

Why the forecasts were way off

James McGrath, co-founder of Yoreevo, gave a "C" grade to all the 2019 expert predictions above.

"These predictions simply extrapolated recent trends in the news cycle at the time. The Fed had just raised rates in December 2018. And more increases were expected," says McGrath. "But the economy slowed, and the Fed started cutting rates instead. That's why mortgage rates have declined."

Rick Sharga, president/CEO of CJ Patrick Company, gave a "D+" grade to these 2019 predictions.

"Everyone was wrong last year - including me," he says. "A year ago, long-term interest rates, which move in lockstep with the yields of 10-year U.S. Treasury Bonds, were all rising. The economy was outperforming expectations. And the Federal Reserve was raising its Fed Funds Rate. All signs were pointing toward short-and long-term interest rates moving up and mortgage rates moving up with them."

But global trade wars and international economic uncertainty "changed the math pretty dramatically," notes Sharga. "As foreign economies struggled, billions of dollars poured into U.S. Treasuries in a flight to safety. That drove bond yields down. This, in turn, caused mortgage rates to take a U-turn. And that has helped more consumers afford the homes they wanted, even while home prices were going up 6% year-over-year."

Looking closer at rate-affecting factors

Lawrence Yun, chief economist for the National Association of Realtors, agrees that trade wars changed matters significantly.

"Late in 2018, the Federal Reserve was facing a tightening labor market and rising wages. Because of economic circumstances and the need to show independence from the White House, the Federal Reserve held firm about raising rates," Yun says.

But economic circumstances change quickly when President Trump indicated trade war possibilities.

"That led to money being pulled out of the stock market and into the bond market. And that lowered interest rates," continues Yun. "Also, because of the trade war and uncertainties, the Fed communicated the need to stop raising interest rates and possibly lower them. That signal quickly brought down mortgage rates. All the while, the tight labor market has not pushed up the inflation rate. That's given comfort to the Fed to not raise interest rates."

Related: How to Negotiate a Better Mortgage Rate Using the Loan Estimate Form?

Why predicting rates is so tricky

McGrath believes forecasting interest rates is virtually impossible.

"If anyone could accurately predict them 51% of the time, they would be a billionaire. There are hedge funds with virtually unlimited resources trying to do this every day," adds McGrath.

Steven Jon Kaplan, CEO of True Contrarian Investments LLC, agrees.

"Not many people, even baseball insiders, correctly guessed a year ago that the Washington Nationals would win the 2019 World Series," says Kaplan. "Just as with stock market forecasts or baseball picks, prospective borrowers should take the so-called experts' opinions with a whole shaker of salt."

A major problem with mortgage rate forecasts? There's no single thing that drives them up or down, Sharga says.

"They have historically trended to mirror the yields of U.S. Treasuries," explains Sharga. "But the factors that can impact those yields vary. They range from runaway inflation to the potential insolvency of a European nation to the threat of war in the Middle East. Rates are also affected to a certain extent by market conditions and the federal government's fiscal policy. The more unpredictable the government is, the more difficult it is to predict mortgage rates."

Related: When should I refinance my mortgage?

Should you care about mortgage rate predictions?

Still, rate forecasts can be helpful - as long as you don't completely rely on them.

"While long-term interest rate predictions might be far-fetched, it isn't impossible to see where mortgage rates are going in the short-term," says Gina Pogol, personal finance specialist with MoneyRates.com.

"If you understand that certain economic reports (like the monthly Employment Situation report) can affect mortgage rates, you can protect yourself by locking in before their release or choose to gamble on the possibility of a lower interest rate. If you understand the relationship between Treasuries and mortgage rates, you can spot trends and make better decisions when shopping for a mortgage."

Yun says rate forecasts can be helpful to consumers "who want to prepare about whether to enter the market now or wait." But even more important than evaluating mortgage rates these days is "finding the right home in a tight supply condition," he says.

"Mortgage rate predictions should be used as one consideration in making a home purchase or refinance decision," Sharga suggests. "But they should never be the sole factor a borrower uses."

Sharga's advice?

"Look at mortgage rate predictions the way investors look at a stock prospectus or a bettor looks at odds for a horse race at the track. They can be somewhat helpful in indicating the most likely outcomes. But they're hardly a 'sure thing.'"

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