A new study is out from the Mortgage Bankers Association that says mortgage rates will reach 6% mid-2010, then plateau for the rest of the year. But look out for 2011 — the MBS says rates will keep rising.
The rise in mortgage rates will be slow, but steady. According to the MBA, mortgage rates will gradually rise over the next eight quarters — from a low of 4.9% in the last quarter of 2009 to 5.5% in 2010 and then up to 6.2% in 2011.
That level is just about where mortgage rates stood at the end of 2007 — just as the U.S. and global economies began to slide off the cliff.
Why the run-up in rates? Here are a few key reasons:
- The MBA cites the decision by the Federal Reserve to end its $1.25 trillion mortgage-backed securities program in March. When the powerful Federal Reserve cash engine pulls out of the private mortgage securities market, look for rates to rise as less money is left in the market.
- Another reason, although the steam seems to subsiding, is the stabilizing economy. More economists are saying that the worst is beyond us economically, and that, short of rising employment, the U.S. has seen growth in just about every key economic area. That list includes gross domestic product, which increased by 2.2% in the third quarter of 2009, after falling by 0.7% in the second quarter.
- The stock market is another avenue of growth, suggesting that forward-thinking investors feel times are slightly more flush, and thus warrant increased injections of cash into the domestic financial markets. The Dow Jones Industrial Average ended the last quarter of 2009 up 8.9%, and ended the year up an impressive 22.7%.
- Lastly, the housing market is showing signs of sustainable growth, thus adding to the perception that the economy is getting stronger, and that higher rates will follow as the Federal Reserve eventually tightens interest rate levels to thwart inflation. The MBA estimates that housing starts will rise on a quarterly basis throughout 2010. With 480,000 single-family housing starts in our rearview mirror for the fourth quarter of 2009, the MBA expects that number to rise 660,000 starts in the fourth quarter of 2010 and eventually reach 840,000 in 2011.
As mortgage rates rise, the MBA warns, total U.S. mortgage activity for 2010 will fall correspondingly. With a decreased appetite for buying a home with a more expensive loan, or for refinancing into loan rate levels at 6%, total mortgage activity is expected to drop to $1.28 trillion this year. That’s down from $2.11 trillion in 2009. Refinancings, which made up 65% of all mortgage loans in 2009, will fall to 39% of all mortgages in 2010, the MBA reports.