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Are Mortgage Rates Going Up, Up, Up?

December 27th, 2009 categories: Loans / Financing, The Economy

UPDATE (12-28-09): Just came across this Washington Post article, which says that Freddie Mac is predicting interest rates of 6% at some point in 2010.

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When you watch the real estate market on a daily basis, as I do, it’s easy to read too much into a few solitary changes over a relatively short period of time.

But every new or emerging trend has to start somewhere, doesn’t it?

And that’s what’s caused me to wonder if the recent uptick in interest rates is just a random blip on the radar screen or instead the beginning of a climb towards higher and higher mortgage rates.

If you haven’t been watching the Freddie Mac Primary Mortgage Market Survey (on the left sidebar of our web site), you may not have noticed, but over the past three weeks, interest rates have turned north.

Freddie Mac - Chart -- Dec. 24, 2009

As of Christmas Eve, interest rates nationally had risen to their highest level (5.05%) since Labor Day. And that was just three weeks after hitting an all-time low of 4.71%.

On a  historical or even year-to-date scale, a rate of just over 5% shouldn’t sound like bad news at all. Rather, it should sound pretty darn appealing — especially when you consider they were as high as 5.59% in mid-June.

But what makes the climb of the last three weeks seem potentially a little more ominous is that

1)  rates jumped so much in such a short amount of time; and,

2) we’ve been hearing for several months now that rates are going to start climbing after the first of the year.

So that begs the question: Is the uptick in interest rates between Dec. 3 and Dec. 24 just a minor blip on the mortgage rate radar screen or is it a harbinger of things to come?

To be sure, in recent months, I’ve heard, read and seen plenty of talk from many different sources that rates are destined to increase starting in January.  But I’ve also seen reports indicating that rates should stay low for the foreseeable future.

So there are two camps of thought.

The ‘Rates Are Going Up’ Camp

As we’ve heard for several months now, the government’s program to buy back mortgage-backed securities will cease by the end of the first quarter of 2010.

Ever since the bailout program began, the government has been buying newly originated mortgages. And since the government has remained a ready-willing-and-able buyer for these MBS’s, lenders have been able to keep interest rates low and mortgage funds flowing.

The problem, though, is that the government’s buy-back program hasn’t necessarily been based on real-world economics. They’ve been buying these securities in order to maintain and stimulate the economy, not necessarily because they represented great investment opportunities for the federal government.

So once the government stops buying, rates will be determined by whatever the real market is for these MBS’s.

If lenders have to raise interest rates to make them more attractive to investors, then mortgage rates could very well rise — and in short order, too.

Those predicting an increase in interest rates say rates could easily approach 6% by early spring.

The ‘Rates Will Be Just Fine’ Camp

Despite what all the MBS doomsayers predict, there are those who believe that the government will do all it can to keep the real estate market humming along.

For that, they insist, is the only way the economy will continue to grow.

If the government were to sit idly by and watch interest rates rise to 6 or 7 percent in overnight fashion, the real estate market could easily come to a grinding halt again.

And since housing would instantly become less affordable, a good number of today’s buyers would exit the market very quickly.

Couple that with the end of the home buyer tax credit in late April, then add in the possibility of the banks suddenly releasing more and more REO inventory at the same time and you have a recipe for disaster.

It could be another ‘perfect storm’ — which could quickly return the real estate market to the doldrums of ‘07 and ‘08.

That’s why many who are paid lots of money to predict these things, say that the government won’t sit idly by and watch the real estate market’s shaky foundation collapse. Rather, they say, the government will do everything it can to keep the recovery underway.

And if that means keeping interest rates from skyrocketing, then that’s what will happen.

At this point, nobody really knows which camp is the right camp.

The big unknown is just how popular these MBS’s will be once the government turns off its spigot.

In recent months, the Treasury has been slowly decreasing its purchases, in hopes that by the end of March, when all of its MBS money is gone, the free market will have gradually filled the void on its own.

And if its pie-in-the-sky dream comes true, by the time the government is out of the MBS game, the real estate market will be humming along at a healthy clip and investors will view these new MBS’s as safe and sound investments and not mere cousins to those troublesome subprime MBS’s of yesteryear.

I tend to be an optimist and have an intuition that one of two things will happen: either the investors will return to the MBS market in greater numbers than the doomsayers predict or the government will take quick action if they see interest rates rising rapidly and threatening the recovery.

Then, too, as I said at the top of this post, the recent 3-week uptick in interest rates may turn out to be nothing more than a blip on the radar.

If so, we may see rates settling back down again in the coming weeks.

If not and if rates continue to climb, the first few months of 2010’s real estate market should have a very big impact on what happens to the overall economic recovery.

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And if its pie-in-the-sky dream comes true, by the time the government is out of the MBS game, the real estate market will still be cranking along at a healthy clip and investors will view these new MBS’s as safe and sound investments and not mere cousins to those ill-fated subprime MBS’s of yesteryear.

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This entry was posted on Sunday, December 27th, 2009 at 3:51 pm and is filed under Loans / Financing, The Economy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

  1. Jeff Green said at December 31st, 2009 at 9:23 pm

    This is a good information for first time home buyers and of matters on mortgages and home buyer tax credit. A good resource!

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