It wasn't too long ago that mortgage rates were expected to move sharply higher in the coming months thanks to rattled investors and mounting inflation. But while falling home prices and jittery financial markets have done little to assuage investor fears, a number of recent developments have combined to create a decidedly optimistic mortgage-rate outlook for 2009. "The preponderance of forces that would typically operate on mortgage rates — the economic backdrop, the inflation backdrop and, in this case, government policy — are all pointing towards lower interest rates," says Mike Larson, a real-estate analyst at Weiss Research.
Rates have already become increasingly attractive. The average national rate for 30-year fixed mortgages fell to 5.57% in the week of Dec. 5, from 6.61% just seven weeks earlier, according to HSH Associates. Here's a look at where mortgage rates are headed in the new year, the forces that will be influencing them, and how consumers can take advantage of the trends.
1. 2009 rate outlook: Thirty-year fixed mortgage rates should begin 2009 at around 5.5%, says Keith Gumbinger of HSH Associates. From there, they will "wax and wane" in the 5.5% to 6% range, before closing out the year somewhere between 6% and 6.25%. "That's still very attractive," he says. "There is no reason to think that rates are going to go up so substantially so as to erode the marketplace." (However, should the economic outlook improve more quickly than expected, mortgage rates could trend higher, Gumbinger says. In addition, new government programs unveiled next year could alter the projection.)
2. Inflationary easing: With the global economy headed for what many expect to be a nasty recession, the inflationary pressures that looked so menacing in the summer have quickly dissipated. The government reported in November that the core consumer price index — a measure of inflation that excludes volatile food and energy prices — decreased by 0.1% in October from the previous month, a sharp decline from the 0.3% monthly increase posted in July. At the same time, crude oil has plummeted from more than $140 a barrel in the summer to less than $50 a barrel in December. When inflation eases, yields on government bonds—such as the 10-year Treasury note — tend to drift lower. And because 30-year fixed mortgage rates typically track the yields on 10-year Treasuries, the diminished inflationary outlook has helped pull rates down. "The sudden collapse in prices has changed things dramatically," Gumbinger says. "That was really one of the linchpins as to why rates finally did fall."
3. Recession: The National Bureau of Economic Research recently announced that the United States did indeed enter a recession in December 2007. While predictions as to the duration and depth of the recession vary, economists at Goldman Sachs recently revised their original forecast in the face of deteriorating economic news. "This deepens and extends the expected recession, bringing the drop in GDP close to the decline seen in 1982 (2.3% in our forecast versus 2.7% then)," the economists said in the report.
The recession is likely to put additional downward pressure on mortgage rates in two key ways. First, the economic contraction will work to stifle inflation. And second, it will support the ongoing "flight to quality," whereby investors move cash from more risky investments — such as stocks — to ultrasafe government securities. Such forces are already bringing yields on government bonds sharply lower. Ten-year Treasury yields fell to 2.66% during the week of Dec. 5, from 4.02% just seven weeks earlier. "You are seeing nominal Treasury yields at new multidecade and, in some cases, all-time lows," Larson says. "[This] should add downward pressure on mortgage rates as well."
4. Government action: The outlook for mortgage rates has also been influenced by recently announced government initiatives. In late November, the Federal Reserve announced plans to buy up hundreds of billions of dollars in debt and mortgage-backed securities from government-controlled mortgage finance giants Fannie Mae and Freddie Mac. The plan is designed to reduce Fannie's and Freddie's financing costs, thereby enabling them to pass savings on to individuals in the form of lower mortgage rates. The Fed has since suggested it may begin buying long-term Treasury bonds, which could bring 10-year Treasury yields even lower. These announcements triggered an immediate drop in mortgage rates and could continue to keep rates low in the coming months. And while the massive bailout initiatives that governments around the world are now undertaking will undoubtedly lead to renewed inflationary pressures, this impact is unlikely to materialize until 2010, Gumbinger says.
5. Housing market turmoil: The decline in home prices, coupled with rising mortgage delinquencies and foreclosures, has prompted investors to demand higher returns on their investments in securities backed by home loans. As a result, the spread — or the difference — between the yields on 10-year Treasuries and 30-year fixed mortgage rates has widened significantly. This spread expanded to nearly 3 percentage points in the week of Dec. 5, from 1.5 percentage points in the first week of June 2007, before the credit crisis struck. And with home prices expected to continue falling throughout at least the first half of 2009 — and mortgage delinquencies accelerating — this "risk premium" should remain elevated. "We're not going to get back to the same tight relationship between the 10-year [Treasury] bond and fixed mortgage rates any time soon," says Tom Vanderwell, a mortgage lender from Michigan. But despite this upward pressure, Vanderwell says he expects mortgage rates to finish 2009 somewhere between 6% and 6.25%.
6. Lending standards: Although mortgage rates are likely to remain attractive next year, not everyone will be able to take advantage of them. Many homeowners with adjustable-rate mortgages who would like to refinance into more affordable, fixed-rate home loans have negative equity, meaning they owe more on their mortgage than their home is worth. As a result, they will not be eligible for refinancing. Meanwhile, those looking to purchase a home will face a credit environment that is significantly tighter than in the housing boom days. In order to access today's most attractive rates, borrowers will have to be able to document their income, make a down payment and have good credit. Mark Hanson, a managing director who handles real-estate and finance research at the Field Check Group, says there aren't a great deal of potential homebuyers in the market today "who have jobs, two years of tax returns, [who] are qualified, and have saved a large enough down payment."
7. No rush: But even though rates may be low today, Larson says qualified borrowers shouldn't feel pressured to see their lender immediately. "This is a lot less of a situation where you've got a temporary spike lower that if you don't get out the door in 48 hours, these rates are going to be gone," Larson says. "This is more of a longer-lasting trend where — sure, you will see some fluctuations — but that the trend in rates is probably lower for a number of months."
By Luke Mullins, U.S. News & World Report
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