Mortgage interest rates have hovered around 5 percent lately. During the past year even reached record lows yet it seems the winds could be changing soon for the rate market.
Yields on benchmark 10-year notes will climb about 40 percent to 5.5 percent, the biggest annual increase since 1999 is a prediction by David Greenlaw, chief fixed-income economist at Morgan Stanley in New York. This surge could push interest rates on 30-year fixed mortgages to between 7 to 8 percent, almost the highest in a decade according to Greenlaw.
Is it really possible for mortgage rates that have been so comfortably low for years to rise up 2 to 3 percent in the near future? How could that happen? It is actually a forecast that is being espoused by many economists these days. The reason for the rate hike appears to be a combination of the end of the Fed securities buy-back program and potential difficulty in selling off U.S. debt.
The Federal Reserve had been actively buying up soured mortgage-backed securities from off the market for the past year as a way of saving private investors from losing more money. The Fed has stopped MBS purchases as of March 31, 2010.
One potential outcome of this government pull out is that there will be few private investors willing to put their money back into mortgage-backed securities. These investments have been very risky since the popping of the housing bubble and without the promise of the Fed to buy up all the toxic securities, there will be little incentive to sink money into investments backed by loans that still have a high likelihood of foreclosure. For private investors to start investing in MBS again, the yields are going to have to be much higher, and some say that will cause a dramatic rise in rates this year.
Higher rates mean harder times for the housing market. Home sales could stall, which could lead to a drop in home values. As ARM loans reset, higher rates could cripple homeowners and contribute to another wave of foreclosures across the country. While there may be nothing that can stop this process, the best advice for individual home buyers at this point is to quickly lock in today's current rates before things start moving upward.
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