Interest Rates to Stay Up

We’ve grown accustomed to low mortgage interest rates, with rates hitting 3.5% or lower in late 2012 and early 2013. 

However, Mike Fratantoni, chief economist at the Mortgage Bankers Association (MBA) says that, “It’s highly unlikely that we’re going to get back to those levels again.”

Thanks to the Federal Reserve Board’s Quantitative Easing program the benchmark U.S. mortgage rates hit record lows not seen in more than forty years.  The Fed had been buying $85 billion of Treasury bonds and mortgage-backed securities each month in a bid to drive down rates on mortgages and other long-term debt.  They succeeded.

When the Fed hinted last May that they might begin to cut back on the QE3 program interest rates shot up a full percentage point in just one month., later stabilizing in the mid four percent range.  The Fed has now begun to cut back on QE3 over the past two months with the $85 billion per month purchase of the mortgage –backed securities being reduced to $75 billion and now to $65 billion in purchases each month.

Market analysts now expect that mortgage rates will be pushed up over 5 percent as a result of the quantitative easing phase-out and the strengthening of the national economy.  They also anticipate a rise in inflation rates.  Fratantoni predicts rates will hit 5% by summer and 5.3% by the end of this year.

Zillow’s economic research director Svenja Gudell says interest rates will hit 5 percent later this year, but that rate levels will rise slowly enough to give consumers plenty of time to buy or refinance before then.

She adds, “I don’t think there’s the need to rush out and buy a house this very second,” but I’d recommend locking in a mortgage below 5%, because I expect rates to continue rising.”

Gudell believes lenders will have to loosen up on the current relatively tight lending standards in order to keep their “home-loan operations humming.”  She notes that, higher interest rates normally reduce consumer demand and mortgage activity.