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2006: A look back - A look ahead  
  Mortgage rates and home prices rose in 2006 while a refi boom is anticipated in 2007.
 Personal finance calendar  Personal finance calendar 

Some ARM borrowers will refi in 2007

Median house prices began falling on a year-over-year basis in the fall, and the National Association of Realtors predicts that falling prices will persist into January and maybe February "before gaining positive traction," as an NAR news release put it.

"Our sense is that home sales may have reached a low in August," the Realtors' chief economist, David Lereah, says, adding he expects the pool of unsold houses to shrink early in 2007 "to the point where home prices will rise, but at a slower pace than historical norms."

Such a real estate environment is called a buyer's market because the buyers call the shots. The buyer's market is going to present a big problem in 2007 for those unfortunate souls who have nontraditional mortgages with rising rates. The combination of falling house values and rising loan balances can make it impossible to refinance, because you can't get a loan for more than the house is worth, and hard to sell, because the lender will demand the full loan amount, even if the selling prices minus real estate commissions and other costs comes out to less than the loan balance.

On top of all this, the Federal Reserve's course in 2007 is more unpredictable than usual. In 2004, everyone knew the Fed was going to start raising rates. In 2005, everyone knew the Fed was going to keep raising rates. In 2006, everyone knew that the Fed was going to stop raising rates. There is no consensus as to what the Fed will do in 2007 -- whether it will start cutting short-term rates again or hold rates steady or raise them a couple more times.

Most economists predict that long-term mortgage rates will rise gradually through 2007. The same economists predicted a similar yearlong rise in 2006 and were caught by surprise when rates on 30-year mortgages fell more than half a percentage point over the summer.

-- Posted: Nov. 1, 2006
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