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2015 was an easier year than most, for mortgage rate shoppers. Consistency was the standard,  with rates generally hovering  below 4% for most of the year.

That consistency was a mortgage market anomaly though.

In fact, it’s been nearly 20 years since we’ve had such a consistent mortgage rate environment. You have to go all the way back to 1998 according to Freddie Mac’s mortgage rate benchmark survey – the Primary Mortgage Market Survey® (PMMS®) – to find such a small amount of rate movement.

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The “Primary Mortgage Market Survey® (PMMS®)” conducted by Freddie Mac has tracked national mortgage rates since its inception in April 1971.  PMMS is widely considered the foremost reliable, representative source of regional and national mortgage rate trends.

It’s relied upon by both the mortgage industry – to gauge market conditions and mortgage rate competitiveness – as well as the general public who uses the index as a tool when evaluating mortgage loan options.

At their lowest in 2015, conventional 30-year fixed-rate mortgage rates averaged 3.59%, according to Freddie Mac. At their highest, rates averaged 4.09%.

On December 31st, 2015 the national average for mortgage rates was 4.01%.

From a historical perspective, maintaining that tight of a range for mortgage rates over the course of the year is unusual.

Is mortgage rate consistency the new normal or can we expect to see something completely different – something more dramatic – for rates as we move into the new year?

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2016 Mortgage Rate Movers

Almost zero percent.

That was the interest rate banks paid to borrow short-term funds for nearly a decade. Commonly referred to as the “Fed Funds Rate”, this number has real significance. Not only does it move mortgage rates, it moves economies.

A federal funds rate at near zero is squarely designed to make capital more affordable for banks so that they lend it to businesses – both large and small – as well as general consumers.

The point of affordable money is simple – stimulate the national economy by encouraging business to borrow for growth and expansion. It’s also designed – by making credit card and other personal debt more affordable – to stimulate consumer spending.

The policy, along with the other moves the Fed made from 2007 to 2013, did what they were designed to do – get the economy back on track.

Unemployment dropped significantly, consumer spending increased and the housing market continued its march toward fully erasing equity losses accumulated during the Great Recession of 2007.

The economy is growing. That said, it is dangerous for the economy to grow too quickly and the Fed will use the power of monetary policy to try and slow things down to a more sustainable pace. That power is usually flexed by increasing the Fed Funds Rate. In fact, that rate was increased in December for the first time in nearly a decade.

We can expect more increases to the Fed Funds Rate too. At least 2 more times in 2016 it should be raised, but  4 or 5 quarter point increases are not out of the question.

Although the Fed Funds Rate has no direct connection with mortgage rates, it certainly affects them indirectly. In other words, expect mortgage rates to increase in a similar fashion each time the Fed Funds Rate goes up.

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2016 Mortgage Outlook and Predictions

Starting the year at 4%, national average mortgage rates wouldn’t go much higher than that by Spring. However, as the summer buying season heats up we expect rates to start inching up.

For the entire 2016 year, look for the Freddie Mac PMMS average to fall between 4.00% and 4.85% with a slow, but steady, increase throughout the year.

Depending mostly on external factors – terrorism, wars, foreign markets, domestic stock performance, energy prices, general economic growth, etc – the PMMS average mortgage rate could very easily be at 5% by the end of 2016.

Increased global drama will keep rates relatively low though. As we have seen this month, declining oil prices and slower global growth has actually driven mortgage rates lower.

From a mortgage rate perspective; the more global drama the better. Drama sends money into safe harbor investments like U.S. treasuries and Mortgage Backed Securities. The more money that flows toward safe harbor investments the better your mortgage rate will usually be.

On the flip side, if the globe suddenly resembles the famous Coke commercial in which the world is universally purchased a Coke resulting in “perfect harmony”, your mortgage rate percentage will start with a FIVE instead of a FOUR sooner than expected.

It’s been a long time since mortgage rates started with a five, but don’t be surprised if they reach that level toward the end of 2016. We don’t think they will, but it is certainly possible.

Cheap money will not last forever, it never does. If you want to take advantage of it then you’d better act early in 2016 and lock in that affordability for the next 30 years.

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