Home Loans Rates May get a Breather

Fed’s decision on its stimulus is expected to hold down mortgage rates, but not for long.

Daily Breeze– By E. Scott Reckard & Andrew Khouri

The Federal reserves decision to stay the course on its stimulus program should provide mortgage borrowers relief from the tend of higher rates– but not for long. Economists say the announcement only delays the inevitable: a return to 30-year mortgage rates at 5% or higher. Fannie Mae, the largest mortgage finance company, expects the 30 year rate will be at 5.25% by the fourth quarter of 2014, and Moody’s Economy.com is projecting it will hit 5.5% by that time.

We’re expecting the economy to return to more normal activity said Celia Chen, a senior director of Moody’s economic research staff, specializing in housing economics. Fixed mortgage rates were lower this week even before the Fed announced its surprise decision. The average for a 30-year loan fell to 4.5% from 4.57% last week according to Freddie Mac’s survey of lenders, conducted through early Wednesday. The 15-year loan declined to 3.54% from 3.59%

Then Wednesday afternoon, Fed chairman Ben S. Bernanke stunned Wall Street by saying the economy is still too sluggish to start tapering off on the stimulus, as many economists had expected the Fed would do. For now, Bernanke said, the central bank will continue buying $85 billion a month in Treasury and mortgage-backed securities, pumping money into the economy and pushing down interest rates. The terms that lenders were offering on 30-year loans eased immediately after Bernanke’s announcement, said Jeff Lazerson at loan brokerage Mortgage Grader in Laguna Niguel.

The rate for a 30-year loan with no discount points dropped to 4.375% from 4.5% , Lazerson said. To obtain a 30-year fixed mortgage at 4.125% borrowers were paying on point down from two points Wednesday morning. It remains to be seen whether the threat of higher rates will put a damper on the housing recovery. The median home price has flattened over the last two months in Southern California after a remarkable run of big price increases over the last year. That softening could be related to mortgage rates, which have risen more than 1 percentage point since May.

But home sales remain strong, according to a report Thursday from the National Assn. of Realtors. Sales of previously owned homes reached their highest level in six years. August’s annualized rate of 5.48 million  units is 13.2% ahead of the same month last year.

Prices are up nationally as well, the Realtors group reported. The median sale price for resale homes in August rose 14.7% from a year earlier to $212,100, the biggest year-over-year increase since the height of the housing bubble in 2005. In the short term, rising rates are driving more buyers to close on homes, fearing rates will rise even more, said the groups chief economist, Lawrence Yun. But further rate increases may take buyers out of the market.

“Tight inventory is limiting choices in many areas,” Yun said in a statement “Higher mortgage interest rates mean affordability inst as favorable as it was, and restrictive mortgage lending standards are keeping some otherwise qualified buyers from completing a purchase”. Meanwhile, the Federal Reserve on Wednesday clearly expressed reservations about the strength of the broader economic recovery.

Retail sales and industrial production are growing more slowly than economists had expected, and consumer sentiment fell for the second straight month in September to the lowest  level since April, noted Freddie Mac chief economist Frank Nothaft.

This is part was why the Fed chose to keep up its massive bond buying program, Nothaft said.

It also cited the tightening of financial conditions observed in recent months, which in the case of the housing market means the rise in mortgage rates since May.

But Nothaft also said the longer-term trend is for 30-year home loans which in may dropped to as low as 3.35%    on average, to rise back toward more normal levels, meaning mortgages starting with a 5. Freddie Mac projects that the rate will average about 4.5% or less for the rest of this year, “and stimulate further improvement in home sales and home-price appreciation,” Nothaft said in an email.

However, he said we are still projecting the 30-year fixed-rate mortgage to be at or above 5% by the end of 2014.

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