30-year conventional mortgage rate

Categories : Category Insights | Economic Indicators Published on : Jul 27 2017

The majority of mortgages are pooled together and packaged into securities for sale to investors and traded in secondary markets. As a result, mortgage rates typically move in step with the yield on other fixed income securities, such as Treasury Bills, plus a spread for relative risk, term length and liquidity. Like all other fixed income financial instruments, mortgage rates respond to inflation expectations, changes in investor appetite for risk and returns on alternate investments, such as stocks, commodities and foreign currencies.

Mortgage rates declined for the sixth consecutive year in 2012, falling 0.80 percentage points to 3.66%. During the year, the mortgage rate eased to a historic low as growth in the economy fell short of market projections. However, the rebound started in 2013 continued through 2014, with the 30-year conventional mortgage rate reaching 4.17%; alternatively, the mortgage rate contracted 7.7% in 2015, largely due to falling rates from September 2014 to April 2015. In July 2015, the 30-year mortgage rate rose above 4.0%, reversing the below 4.0% mortgage rate trend that had occurred in prior months that year. In late-2016, the Fed again raised the fed funds rate, to the 50-75 basis point range, before raising rates again in 2017. The Fed is expected to continue to raise rates over the coming year, potentially pushing the 30-year conventional mortgage rate up even further in 2017.


As the economy continues to grow, the Federal Reserve may implement additional hikes to the fed funds rate. As funding costs for lenders rise, they will pass on the costs to homeowners in the form of higher mortgage rates. Moreover, the Fed anticipates an uptick in mortgage delinquencies and defaults, thus potentially inciting the Fed to raise the mortgage rate. If inflation rises, then mortgage-backed securities may also become less valuable, causing mortgage rates to rise. Overall, IBISWorld forecasts that mortgage rates will rise to 5.09% by 2022.

Inflation expectations may rise, causing debt holders to require a higher nominal rate to generate the same returns. Additionally, the expected recovery in the United States and other global economies will likely lead to better company performances, bolstering stock prices. This factor will place upward pressure on mortgage rates as the relative return on mortgage-backed securities worsens. However, IBISWorld projects that the spread between mortgages and treasury yields will shrink in 2019 and subsequent years. Still, the Fed anticipates a potential rise in the incidence of borrowers who cannot make their high house payments. Additionally, investor appetite for risk is expected to make a comeback, contributing further to the shrinking spreads between mortgages and safer assets.

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