Thursday, November 19, 2009

Home Mortgage Rates Set to Move Higher Next Spring

Is there a better warning about a good time to buy a home than hearing that the Federal Housing Tax Credit has been extended to sales through April of 2010? Well, yes: An analyst from Reed Construction Data is signaling that Mortgage Rates are going to rise in the Spring of 2010. So the window of opportunity seems to have been set. Great deals on homes now and rising prices and rates in the near future with a Tax Credit expiring. If that isn't opportunity knocking, then you should have your hearing checked!

http://yglesias.thinkprogress.org/wp-content/uploads/2009/05/opportunityknocks-1.jpg

From a Housing Zone article.

30-year fixed mortgage rates, averaging 5% so far in 2009, could jump as much as 100 basis points next spring when the Federal Reserve Board stops buying mortgage backed securities from the federal housing finance agencies. Freddie Mac, Fannie Mae and FHA now provide most of US mortgage financing. And the Federal Reserve Board buys about 80% of the bonds they issue to get the mortgage capital. So far the FRB has bought $900 billion in bonds and has announced that it plans to raise the total to $1.25 Trillion by the end of March and then begin selling its agency bond holdings.

Mortgage rates will rise quickly when the housing financing agencies have to sell all of their bonds in the private capital market. The added supply of bonds will lower bond prices and correspondingly raise bond interest rates. 30-year mortgage rates were over 6% through summer, 2008 before the FRB acted to take over mortgage financing. How quickly mortgage rates rise depends on how aggressively the FRB moves to sell its’ $1.25 Trillion stock of agencies bonds.

The FRB can be expected to sell cautiously for fear that selling will collapse home sales. At the same time, the monetary authorities have no option but to remove the emergency liquidity they added over the last year to avoid serious inflation problems in 2011 and beyond. Other non housing emergency lending programs are already winding down with repayments of TARP loans and several other loan programs for financial institutions. This gives the FRB leeway to remove the emergency mortgage funds slowly.

The action to stop adding capital to the mortgage market will not be popular in Congress. The FRB may be pressured to add more capital or defer removing capital to avoid boosting interest rates which would make refinancing to avoid foreclosure more difficult. Normally the FRB defends its independence from political interference. But the FRB will be locked in a battle with Congress during the winter over proposed legislation to transfer some of the FRB’s regulatory powers to new consumer friendly agencies. Compromise may be necessary. This will weaken any mortgage rate restraint on home sales at the expense of future inflation.

However much mortgage rates rise next spring it will not be enough to stop the projected rising trend in home sales and housing starts. Both confidence and income will be rising again by next winter strongly enough to offset a mortgage rate increase.

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