Mortgage rates will gradually rise over the coming months and may reach 7% in late 2010 – averaging 6% in much of the year. Home buyers have benefited from low mortgage rates last year thanks to Federal Reserve actions.
The Federal Reserve expanded it portfolio of securities issued by the Treasury and by the government-sponsored mortgage agencies Fannie Mae and Freddie Mac. Last year the Fed purchased $300 billion of Treasurys and up to $1.25 billion of agency mortgage-backed securities, in addition to $175 billion of debt issued by the agencies.
The effort helped to keep mortgage and other long-term interest rates low as the government sought to help the economy recover from the worst financial crisis since the Great Depression.
Mortgage Rates on the Rise
The Federal Reserve announced that it would end their mortgage-backed securities (MBS) purchase program by first quarter, which will likely push mortgage rates higher. Bill Gross of PIMCO, bond management company, predicts mortgage rates will increase by .5% to 1% when the mortgage purchase program ends. However, the Fed could start purchasing mortgages again if officials see a huge spike in mortgage rates or significant decline in home sales.
Economists expect the rate on a 30-year fixed mortgage to rise 30 basis points after the Fed’s purchases end. The average 30-year fixed mortgage rate on January 14 was 5.06%, according to Freddie Mac.
Freddie Mac chief economist projects short-term interest rates will show little change during 2010, before rising significantly in 2011, and longer-term rates to move modestly upward over the year.
“As our agency mortgage-backed securities purchases come to an end, we’ll probably see a little bit of upward pressure on interest rates. But there’s a big debate about whether they’ll be small or medium or large. So I think we’ll have to wait and see.” New York Fed President William Dudley said.
Federal Reserve Keeping Inflation Low and Stable
Federal Reserve officials are more confident the U.S. economy is moving toward self-sustaining growth, thus the need for the Fed to timely exit from record-low interest rates. Federal Reserve policy makers fear the risk of losing the public’s confidence in its commitment to keeping inflation low and stable.
“I believe the Fed will need to withdraw the extraordinary amount of liquidity it has provided to the economy and begin to raise interest rates as the economy continues to improve and financial markets return to more normal operation,” said Charles Plosser, president of the Philadelphia Federal Reserve Bank. “If it fails to do so, rising inflation expectations could prompt workers to demand higher wages and firms to demand higher prices to head off the expectation of higher costs, thus setting off a burst of inflation.”
Housing Stabilizes
Federal Reserve purchases of mortgage-backed securities have helped stabilize the housing market, by pushing mortgage rates lower – lowering borrowing costs for many home buyers. Government first-time home buyer $8,000 tax credits also helped propel existing home sales.
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