What's in store for mortgage rates?-President's Message
What’s
in store for mortgage rates?
President’s
Message
Chris
Sloan
Last week the Utah Association of Realtors and the Salt Lake Board of Realtors
reported that home sales along the Wasatch Front increased about 4 percent in
the third quarter. Along with the impact of lower home prices and government
programs, one incentive that has helped spur the sales has been the incredibly
low mortgage interest rates.
Because most homes
are bought using credit, mortgage rates play a significant role in determining
the overall affordability of a home. One study suggests a one percentage point
decrease in rates is equivalent to a 10 percent price reduction.
Although interest
rates have hovered in the 5 percent range all year, there is always uncertainty
in regard to whether they will rise or fall in the future. For anyone looking
to buy a home in the coming months, the question is particularly important.
Mortgage rates are
determined by a variety of market forces, which make it incredibly difficult to
predict exactly which way they’ll move. Generally speaking, 30-year fixed
mortgage rates follow the yields on 10-year U.S. Treasury bonds, because
30-year mortgages are typically paid off in about 10 years because people move
and refinance. Mortgage rates are generally about 2 percentage points higher
than the yields on Treasury bonds, because a homeowner is seen as a greater
default risk than the U.S. government.
One of the greatest
factors in pushing up bond yields, and ultimately mortgage rates, is the
outlook for inflation. If investors expect inflation to rise, they demand
higher rates of return because inflation dilutes the value of the fixed
payments they are scheduled to receive. Hence, if the dollar is weak, then
there is less demand for bonds, which in turn pushes yields and rates up.
“Private investors could furthermore be
worrying about potential inflation in later years when the economy recovers and
want additional premium to compensate for the loss in purchasing power of the
invested money,” said Lawrence Yun, chief economist of the National Association
of Realtors, in an economic commentary.
Another factor in
the mortgage rate equation has been the Federal Reserve’s purchase of mortgage-backed
securities and Treasury debt. With the Fed making huge purchases of Fannie Mae
and Freddie Mac securities, demand has been pushed higher and mortgage rates
have fallen significantly. Mark Zandi, chief economist and co-founder of
Moody’s Economy.com, said in a recent conference that without the Federal
Reserve purchases, mortgage rates would be closer to 6 percent, rather than
today’s rates that are around 5 percent.
The Federal Reserve
has stated it will fulfill its commitment to purchase mortgage-backed
securities by the end of March. Without this government demand, experts say
rates will inevitably rise. Analysts at Barclays Capital in New York forecast
mortgage rates will be slightly more than 6 percent by the end of March,
according to the Wall Street Journal.
Some groups are
hoping the Federal Reserve will expand its purchase program beyond first
quarter 2010, which would delay the increase in rates. However, the Fed has to
carefully plan its exit strategy so it doesn’t risk having too much money in
circulation, which could create inflation risks.
As the Fed plays
the careful act of balancing a fragile economic recovery against inflationary
pressures, it seems certain that interest rates will rise next year although
the timing is uncertain. In its most recent forecast, The National Association
of Realtors predicts the 30-year fixed mortgage rate will begin rising at the
end of this year and will hit the 6 percent level by the end of 2010.
Of course, your own
financial situation will also play a role in determining your mortgage rate,
since those with the highest credit scores tend to receive the best rates. You
can also purchase a better rate using the point system, where you can
incrementally buy down the cost of your loan. Finally, different lenders will
offer a variety of rates and fees, so you’ll want to do some comparison
shopping to get the best price.
While mortgage
markets are notoriously difficult to predict, it seems unlikely rates will go
much lower. So if you are thinking about buying a home, it may be great
opportunity to make a purchase before the Fed wraps up its purchases of
long-term debt. For more information on home buying and mortgages, contact your
local Realtor and mortgage lender.