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2013 Year End Interest Rate Review, 2014 and 2015 Interest Rate Forecast

The last day of 2013 is done and it's a good time to review where interest rates have been in 2013 and where interest rates are expected to head in the next two years. During 2013, mortgage rates and bond rates rose over 125 basis points as the markets feared an end to the Federal Reserve's quantitative easing. While mortgage rates moved higher in 2013, savings rates and short term CD rates were pretty much flat throughout the entire year.

Mortgage rates rose because 10 year bond yields rose during the year. Some lenders set rates on mortgages based on 10 year bond rates. When bond rates move higher, mortgage rates follow higher and when bond rates fall, mortgage rates also fall. Earlier this year 10 year bond rates hit a low of 1.62 percent. 10 year bond rates are just under 3.00 percent at 2.99 percent.

Average Mortgage Rates TodayMortgage Rates Hit Lows in May 2013

The low point for 30 year mortgage rates came in early May, when average 30 year conforming mortgage rates hit a low of 3.35 percent. Right after the low in early May, 30 year rates moved higher and haven't looked back. 30 year mortgage rates today are much higher, averaging 4.54 percent.

Average 15 year conforming mortgage rates hit a low of 2.56 percent in early May and are also considerably higher today. The current average 15 year mortgage rate is at 3.55 percent. Jumbo mortgage rates have also moved higher in 2013 but the increase wasn't as large because jumbo rates never fell as much as conforming rates.

30 Year Jumbo Rates Lower than 30 Year Conforming Rates

Back in early May, average 30 year jumbo mortgage rates hit a low of 3.94 percent. Right now average 30 year jumbo rates are at 4.63 percent. While 30 year conforming rates are up 1.19 percent, 30 year jumbo rates are only up 0.69 percent. This has squeezed the rate curve between both types of mortgages to the lowest point ever. In fact, at one point this year, average 30 year jumbo rates were actually lower than average 30 year conforming rates.

Deposit Rates Remained Near Record Lows in 2013

Average CD Rates TodayMortgage rates are set based on long-term bond rates while deposit rates on savings accounts, money market accounts, and certificates of deposit are more dependent on the federal funds rate. The Federal Open Market Committee (FOMC) sets the federal funds rate based on their dual mandate of full employment and price stability.

The federal funds rate has been in the Fed's targeted range of zero percent to one quarter percent for 5 years now. This has forced deposit rates down to record lows where they have remained for all of 2013. Current average rates at the end of 2013 were near the same levels as they were at the beginning of the year.

The current average savings account rates/money market rates reported by this week are at 0.44 percent this week. Average 12 month CD rates have been higher than average savings/money market rates all year but still remain near record lows. The current average 12 month CD rate is at 0.70 percent, near the same average all year long.

Long Term CD Rates Start to Rise Late in 2013

Late in 2013, as long-term bond rates rose, banks started to increase long term CD rates. It seems more a factor of banks wanting to lock in long term deposits at current low rates than as a result of higher bond rates. Just as we all watch what is happening with economic growth, inflation, and what the Fed says, so do banks.

In the fall of 2013, the best CD rates on our 5 year certificate of deposit rate table were around 1.50 percent. Late in the year, several banks increased their 5 year CD rates to around 2.00 percent. Then in November a credit union, Pentagon Federal Credit Union (PenFed), upped the ante by increasing their 5 year rates to 3.00 percent.

CD Rates, Savings Rates and Money Market Rates in 2014

Prior to the Fed's Decembers meeting, the general consensus was that the Fed was going to increase the fed funds rate when the unemployment rate fell through 6.5 percent. After the Fed's December meeting, they released a statement saying the 6.5 percent unemployment rate shouldn't be viewed as a threshold for a higher funds rate.

Fed Projections for Timing of Policy FirmingRight after the meeting the Fed Chairman, Ben Bernanke, said in a press conference "now we’ve also clarified our guidance that we will be keeping rates low well past unemployment of 6.5 percent." With that statement and the Fed's forecasts for growth and inflation in 2014, we might not see higher deposit rates next year.

The key now to a higher fed funds rate and higher deposit rates is a higher inflation rate. The fed's current forecast for inflation in 2014 is below their long term goal of inflation at less than 2.00 percent. Only 2 of the FOMC's 17 members believe they will have to increase the fed funds rate in 2014 while 12 of the 17 believe the "timing of policy firming" will come in 2015.

The only way we will see a higher fed funds rate and higher CD rates is if inflation becomes a concern for 2014 or 2015.

Mortgage Rates Will Continue to Move Higher in 2014

Current mortgage rates will move higher in 2014 but the increases are not expected to be as much as rates increased in 2013. The Mortgage Bankers Association sees average 30 year conforming mortgage rates moving above 5.00 percent in 2014. In 2015, the MBA sees average 30 year rates moving to 5.5 percent.

The last time average 30 year mortgage rates were above 5.00 percent was in January 2010. According to Freddie Mac, the last time average rates were above 5.50 percent was in January of 2008.  Even with the increase in mortgage rates this year and the expected increases over the next two years, rates will still be low historically speaking.

Recommendations Based on Interest Rates in 2014

If you're thinking about buying a home in 2014 or thinking about refinancing your current mortgage based on the information provided, we can safely recommend locking in a rate sooner than later in 2014. Higher mortgage rates and higher home prices are predicted for 2014.

30 year mortgage rates will increase above 5.00 percent next year and 15 year mortgage rates will be around 4.50 percent. Home prices are forecasted to increased in 2014 but not as much as prices did this year. Home prices on average were up around 12 percent in 2013 and are expected to increase around 5 percent in 2014.

If you have a certificate of deposit maturing in 2014 or are searching for CD rates, stay invested in shorter term CD accounts. Another option is variable rate savings accounts or money market accounts. While deposit rates are not expected to increase next year, they are less likely to decline.

Don't lock into a long term CD account at a low rate when rates will eventually move higher. If not in 2014, most likely in 2015. Of course, we can always hope for higher rates next year but that will depend on the inflation rate and the Fed.
Author: Brian McKay
January 1st, 2014