Tuesday, December 22, 2009

Mortgage Rates Move Higher

by Bill McBride on 12/22/2009 04:34:00 PM

From CNBC: After Record Lows, Mortgage Rates Headed Up in 2010

"If you told me by the end of 2010 a 30-year rate was at 6 percent, that sounds about right," says Mark Zandi, chief economist at Moody's. "I don't think there's any question rates are headed up."
Rates are definitely headed up right now, and with the Fed MBS purchase program scheduled to end in about three months, mortgage rates will probably increase some more. But I think the following estimate is way too high:
"The ending of the Fed program will definitely effect rates," says Mark Goldman, professor of real estate at San Diego State University. "So far, the Fed has not expressed interest in keeping the program going. That could raise rates by some 150-200 basis points."
As I've noted before, I think the increase in rates will be in the 35-50 bps range relative to the 10 year Treasury yield when the Fed MBS purchase program ends. But here is an estimate much higher than mine!

Zandi also suggests there might be some Fed tightening next year due to inflation concerns and that could push up mortgage rates (I think this is unlikely), and also that the bond vigilantes might return next year because of concerns about the U.S. fiscal deficit and push up long rates (also unlikely in my view). Although not impossible, I don't think mortgage rates will rise to 6% next year - mostly because I think the recovery will be sluggish and choppy in 2010, and inflation will be benign (too much slack).

But the fear of higher rates is probably another reason for the surge in existing home sales, although I think the primary driver was the expected expiration of the first time home buyer tax credit.