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Mortgage Rates Will Be Lower Because of Delta-Driven Economic Chill

mortgage rates

A Delta-driven resurgence of the Covid-19 pandemic that has driven infections to record highs in some states will chill the nation’s economic recovery and suppress home-loan rates, according to a forecast by Fannie Mae, the largest mortgage securitizer.

The average U.S. rate for a 30-year fixed mortgage in the third quarter likely will be 2.8%, Fannie Mae said in an Aug. 19 forecast. That’s lower than the 3% the mortgage buyer forecast a month ago for the same period.

For the year, the rate likely will average 2.9%, lower than the 3% Fannie Mae forecast in July before the hyper-contagious Delta strain flooded the nation’s hospitals with unvaccinated Covid-19 patients. Both estimates would be records, beating the 3.1% seen last year, the lowest annual average ever recorded.

“Behavioral changes related to the Delta variant of Covid-19 and persistently strained supply chains will likely weigh more heavily on the speed of recovery than we had previously forecast,” the mortgage securitizer said in a statement.

The Delta variant has ripped through the nation’s unvaccinated populations in the past month, overrunning hospitals and filling ICUs in many states. While the vaccines remain highly effective in preventing hospitalizations and deaths, breakthrough infections among vaccinated people – which tend to be mild – are causing some Americans who are fully inoculated to reconsider economic activities such as dining out to avoid spreading the disease.

In commentary issued with the forecast, Fannie Mae economists pointed to data showing restaurant reservations had dropped and airline flight cancellations had increased. The forecast also cited last month’s consumer confidence report from the University of Michigan that showed Americans had the gloomiest outlook in almost a decade.

“Anecdotally, reports of employers delaying reentry to office work and canceling in-person events and conferences are growing,” Fannie Mae said.

Fannie Mae economists now are forecasting the U.S. economy will expand 6.3% this year, a slower pace than the 7% they predicted a month ago. Last year, GDP contracted 2.2%, according to the Bureau of Economic Analysis.

Most economists had predicted earlier in 2021 that mortgage rates would increase in the second half of the year as the vaccine rollout brought the economy back to full speed. They hadn’t counted on the strength of the anti-vax movement, which has kept the “fully vaccinated” level at just over half of Americans, according to Bloomberg.

The U.S. now lags Spain, Ireland, Chili, and four dozen other countries and territories, with 51.5% of its population fully inoculated, according to Bloomberg's "Vaccine Tracker."

Also, economists hadn’t counted on the ferocity of the Delta variant, which the Centers for Disease Control and Prevention described in a document leaked to the press on July 29 as being more contagious than the common cold, Ebola, smallpox and several other highly contagious diseases.

“The Delta variant is more aggressive and much more transmissible than previously circulating strains,” CDC Director Dr. Rochelle Walensky told reporters. “It is one of the most infectious respiratory viruses we know of, and that I have seen in my 20-year career.”

The lower mortgage rates stemming from the economic impact of the Delta surge should boost demand for home loans, the Fannie Mae forecast showed.

Total originations for home loans likely will be $4.36 trillion this year, with a refinancing share of 58%. A month ago, the forecast predicted $4.20 trillion of originations, with a 56% refinancing share.

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