Thursday, April 8, 2010

Mortgage Rates Probably Will Rise In The Near Future

As the spring real estate season kicks in and the tax credit deadline for sale agreements approaches the government is ending a program that has kept interest rates low and housing-affordability levels high for months.

On March 31, the Federal Reserve stopped buying mortgage-backed securities from Fannie Mae and Freddie Mac, returning control of interest rates to private investors.
For months, industry observers have predicted that once government supports are removed, interest rates will rise, pushing some of the first-time buyers critical to housing’s recovery out of the market.

In late summer and fall 2009, lured by fixed 30-year mortgage rates under 5% and the first $8,000 tax credit, which expired Nov. 30, first-timers pushed sales of previously owned homes to the highest levels in at least three years, reducing record inventories and braking price declines.

Moody’s Economy chief economist Mark Zandi said rates will “drift” higher in summer and fall, with the half a percentage point the Fed’s action cut working its way back in—mainly because investors believe the government would return if they got too high. Buyers of these securities now see that the lenders have instituted rigorous standards to ensure that the Fannie Mae and Freddie Mac paper they are buying are good loans.

On the other hand, rates this low are historically not sustainable, and the only way to get the market to stand on its own is to get people to become realistic again about prices and rates. Rates will likely rise but the level will still be historically low.

When rates do rise, it won’t be because of the Fed’s action, but natural macroeconomic forces like a recovering economy and the high budget deficit. The possibility of renewed Fed intervention will likely prevent rate increases resulting from private investors demanding large risk spreads. Many Fed officials have emphasized that high unemployment and tame inflation warrant a continued promise to hold rates very low for a long time.

Treasury bond yields did not move much after the Fed completed its $300 billion in purchases meaning they were able to exit and not disrupt that market. Rates will rise modestly. With unemployment high and foreclosures still an issue, a significant rate increase would push home prices down even further and hamper any recovery.

1 comment:

  1. Thanks Herb. Where does consumer spending fit into this?