2011 Interest Rate Forecast
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Mortgage rate forecast less of a bargain

2011 Interest Rate Forecast » Mortgages forecast to climb in 2011

First the bad news: That 4.2 percent 30-year fixed mortgage rate some borrowers were lucky enough to snag in November? It's history.

Now the good news: Despite a weeks-long run-up from that trough, mortgage rates are still historically low and aren't expected to rise more than another half percent -- or less -- in 2011, according to economists and analysts.

"The bottom in rates is behind us," says Freddie Mac's Chief Economist, Frank Nothaft. "That's not to say today's rates are high. They're not. Aside from what we experienced the last couple of months, these are the lowest rates we have seen since the 1950s."

Still, Nothaft says, "I do think they will be higher at the end of 2011 than (the end of) 2010."

Cameron Findlay, chief economist at LendingTree, believes 30-year fixed rates will rise to about 5.25 percent in 2011. "We don't expect any significant rise from that point," Findlay adds.

The Mortgage Bankers Association, in its most recent rate forecast on Dec. 17, is a tad more bearish, predicting rates will climb to 5.5 percent by the end of 2011 and "above the 6 percent mark" in 2012.

What caused rates to bounce off their November lows? Inflation fears.

The Federal Reserve's quantitative easing program, or QE2, was designed to inject massive amounts of capital into the nation's banks. The goal: banks will be so brimming with cash they will start making more long-term loans, such as mortgages.

However, inflation fears stoked investors to abandon bonds, which had the effect of pushing up 10-year Treasury yields in recent weeks. Mortgage rates track those yields. Further, the extension of the Bush tax cuts in December 2010 encouraged investors to choose stocks, yet another reason bonds started paying higher rates.

"Inflation is a real concern and investors are trading on that," Findlay says. "And it is all driven from the excess liquidity. We can't maintain that level of excess liquidity long-term without it creating inflation."

Though the higher mortgage rates caught consumers off guard -- and put a real damper on the refinancing boom lenders were enjoying -- today's levels more closely mirror a more normal market, economists contend. Rates stuck in the low- or mid-4 percent range would mean the economy is declining and probably in a double-dip recession.

"We have gotten some encouraging economic news over the last couple of weeks and it looks like we will see income growth," Nothaft says. "We will see more job growth and we will be in an environment where core inflation will remain in check at a relatively low level. That's our view."

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The economic indicator most closely hinged to housing, all agree, is unemployment. And even the most optimistic projections for 2011 are uncomfortably high. Fed Chairman Ben Bernanke recently warned: "We may be years away from having normal unemployment again."

Still, economists interviewed for this article forecast a slow whittling of the jobless rate through 2011 -- to about 9 percent or 9.2 percent. "We all wish it was more robust, but it is moving in the right direction," Nothaft says.

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