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.”
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.
That’s not true for home prices, however. Nothaft sees housing values bottoming out in the first half, then slowly rising. Findlay says prices nationally have fallen about 28 percent peak to trough; he thinks they will drop another couple of percentage points.
Pete Flint, CEO of Trulia.com, a realty research firm, is less hopeful. He sees a decline of 5 percent to 7 percent nationally — more in highly stressed markets — and doesn’t foresee recovery until 2012.
“All in all, I expect 2011 to be another volatile year for real estate,” Flint says. “Prices will fall, with the exception of a few cities, which will lead us out of this housing recession, and mortgages will become even harder to get. Mortgage rates will rise, though they will still be quite low in the historic scheme of things.”
For consumers with jobs, that means improved housing affordability.
“For those who have the financial resources, this is the time to be in the market to take a look,” says Nothaft. Those who can afford the larger monthly payment could find a 15-year-fixed, with rates closer to 4 percent than 5 percent, attractive.
“The problem is,” says Flint, “even an incremental boost (in rates) will cause an increase in monthly mortgage payments for would-be buyers, and may even price out some out of the market.”
While consumers who didn’t get around to refinancing may be kicking themselves, it might still make sense. Even those whose homes have declined in value may qualify for the Obama administration’s Making Home Affordable refinancing program. But don’t wait — it expires in June.
Findlay says that, particularly in periods of volatility, there is a great disparity in rates out there. Yet, a Harris survey commissioned by LendingTree found only 28 percent of respondents thought they got the best deal available; 40 percent had sought only one quote.
The bottom line, Findlay says: “It pays for consumers to shop around.”
Bankrate has a comprehensive analysis of where all sorts of interest rates are likely headed in 2011, and how these moves will affect you. Go to 2011 Interest Rate Forecast to view the full report.