With the tapering of the Fed’s Quantitative Easing (QE) program, economists are predicting that rates will continue rising for the remainder of 2013. This is based on the dramatic rise of the 10 year Treasury yield over the last month to which mortgage rates are loosely tied. The 30-year, fixed rate loan recently went above 4.5%, the highest it has been since 2011. Meanwhile, the average rate for a 15-year loan rose above 3.5%, also a two year high. But the rise should be slow and steady going forward now that market expectations are more aligned, and more importantly rising rates should not derail the housing market recovery. The 50 to 100 basis point (0.5% to 1%) spike in rates last month, which was widely publicized by the mainstream media, was also off very a historically low mortgage rate base.
Government controlled mortgage giant, Freddie Mac now forecasts rates on 30-year mortgages will climb to 4.6 percent to 4.7 percent by the end of this year. A 30-year mortgage now averages about 4.3 percent, up almost one full percentage point from the record low set in November. “We won’t know the immediate impact on the pop in mortgage rates for another couple of months,” said Freddie Mac Chief Economist Frank Nothaft. “However, we don’t expect them to stall the housing recovery because demand is strong, supply is limited and housing affordability remains strong in most markets for most families.”
The reason people are concerned about higher rates is that even a two percent rate rise could add about 25 percent to the monthly cost of a home. Here’s an example: $300,000 home at 4% rate = $1.432 monthly payment vs a 300,000 home at 6% rate = $1,798 monthly payment. Big difference.
Freddie Mac’s Housing Market outlook expects prices to continue rising as well, though at a more moderate pace. With median prices up about 5 percent through the first six months of 2013, it forecasts prices to rise another 3 percent to 4 percent the remainder of the year, for an annual gain of 8 percent to 9 percent this year. It also forecasts sales of both new and existing homes to be up another 2 percent in the second half of the year.
But is there anyway rates could fall again? Should I wait to purchase or refinance a home
This is also a question I hear a lot. Buy it’s unlikely rates will fall anytime soon, unless the U.S. economy slows down significantly or unemployment spikes. This will force the Fed to restart another round of bond purchase, or QE4 as some call it. And even if rates fall they are not going to come any lower than 4%.
Historically rates are still very low and if you can afford the monthly payment at current rates, then buying or refinancing is still a good idea (see the best rates in your area). This is particularly the case if you have a loan with interest rates above 6%, want to move to a shorter duration loan and/or dealing with Jumbo loans.