There is a lot of speculation that mortgage rates will rise above 6% once the Government’s different programs run their course (TARP, $8000 New Home Buyer Credit, etc) and financial institutions stop their foolish purchasing. Believe me, this is a good thing. Especially if you have been saving cash to buy a home. High interest rates make everyone’s cash in the transaction more valuable. And reading articles like the one below are indicating exactly that. Now, whether or not the Government steps in with something new to prop things up is anyone’s guess. But if they don’t…watch out. Housing prices would have no where else to go.
MORTGAGE FINANCING
FHFA reducing Fannie, Freddie portfolios
The federal regulator in charge of Fannie Mae and Freddie Mac said Tuesday that the mortgage finance giants would not be taking on additional measures to bring down interest rates on home loans as other government programs to stimulate the housing market expire.
The Federal Housing Finance Agency said it is committed to reducing the companies’ mortgage portfolios and does not expect the firms “to be substantial buyers or sellers of mortgages.” The agency said it expects private investors will step in as other government initiatives, such as the Federal Reserve’s trillion-dollar mortgage-acquisition program, wind down.
– Zachary A. Goldfarb
The scary part is that more and more of my friends are walking away from their homes. And this downward pressure on home prices will incite more debt slaves home owners to do just that. Walk away. So where does it stop?
These guys think mortgage rates will rise a little in the spring and dip in the summer.
http://forecasts.org/fha.htm
It’s impressive how much difference the mortgage rate makes in monthly payments. Consider that $69K loan amortized over 15 years from the previous post.
At 4.5% your monthly payment is $527
At 5% your monthly payment is $545
At 6% your monthly payment is $582
At 7% your monthly payment is $620
At 8% your monthly payment is $659
At 9% your monthly payment is $699
At 10% your monthly payment is $741
Could mortgage rates go back to 10%, where they were 20 years ago? (Historical data here http://forecasts.org/data/data/MORTG.htm)
Maybe if we get back into an inflationary cycle, but that won’t happen overnight.
“Maybe if we get back into an inflationary cycle, but that won’t happen overnight.”
Agreed. But I think we know it is around the corner.
Historically mortgage rates have changed slowly over time. Here’s a graph of 30-year fixed mortgage rates from 1971 to the present.
http://mortgage-x.com/images/graph/r_30_prime.gif
The mortgage rates roughly track the prime rate, although the prime rate is exhibits a little more volatility. So is the prime rate going to rise soon?
“So is the prime rate going to rise soon?”
I don’t think we will see prime rise anytime soon. So the graphs that you supplied would argue that historically, mortgage rates will be low for a while. But that is exactly what I don’t understand. Right now the FED has the prime rate pegged at .25%. Less than 1%. Looking at those graphs, it would seem that mortgage rates should have fallen closer in proximity to prime, yet they haven’t. Why?
Look at all the lows in the prime rate on the graph (72, 77, 87, 93, 04 and 09) and you’ll see the mortgage rate is always higher. There’s a floor on the rates lenders can charge and still make money, and for conservative lenders that appears to be in the vicinity of 5%. The only way I can imagine rates going much lower would be in a prolonged deflationary period. Even though the CPI was negative for a while in 2009 it’s in positive territory now.
http://data.bls.gov/PDQ/graphics/CUUR0000SA0_19141_1265578120392.gif