By Tom Reddin
The Charlotte Observer (MCT)
As we head into the spring home-buying season, the housing market is picking up steam, and mortgage rates are still near historic lows. Many homebuyers are wondering where mortgage rates are heading this year as they consider purchasing a home.
Mortgage rates have ticked up a bit since the historic low recorded in November. According to Freddie Mac, rates in November hit 3.31 percent for a 30-year fixed-rate mortgage with 0.7 points paid at closing. As of Feb. 28, the average rate was 3.51 percent with 0.8 points paid. So rates have gradually risen since November, but are still near record lows and down from 3.90 percent at this time last year.
Let’s take a look at the market forces driving these conditions, and then I’ll give you my forecast on where mortgage rates are heading for the remainder of 2013.
First, let’s look at the housing market. It’s clearly recovering from the financial crisis of 2008. Home prices have been steadily increasing over the past few years and inventory of homes for sale continues to decline. These are signs of a strengthening housing market.
At the core of this housing rebound is a slow and modest recovery in the overall U.S. economy. We have experienced one of the weakest economic recoveries since World War II, but our gross domestic product is growing at a modest rate of approximately 2 percent over the past few years. Economists would normally expect a rebound of 3 to 5 percent growth in GDP after such a severe recession, but at least the U.S. is experiencing some level of growth, while other countries are still in a recession. This slow-but-steady growth in the economy is gradually absorbing the housing inventory for sale, leading to a strengthening housing market.
According to the National Association of Realtors, existing home sales are on the rise, with the number of homes sold in January up 9.1 percent over the same period one year ago. And the inventory of homes available for sale in the U.S. is decreasing, with 4.2 months of supply on the market, the lowest level since April 2005. As a result, home prices continue to rise with the national median home price increasing in January to $173,600, up 12.3 percent from January 2012.
Builders are also ramping up their construction of new homes. According to the U.S. Department of Commerce, homebuilders started construction on 780,000 new homes in 2012, up 28 percent over 2011. This is the highest level of construction since 2008.
So it’s clear that the housing market is recovering, and confidence is building among homebuyers and builders. But how will mortgage rates respond during this recovery?
One of the major factors driving our record low mortgage rates is the U.S. government’s bond-buying program, known as quantitative easing or QE3. QE3 is an intentional program to increase the price of mortgage-backed bonds, which in turn decreases the interest rate on these bonds. The government is purchasing approximately $40 billion of mortgage-backed bonds each month and has stated that they will continue to do so for the foreseeable future to maintain low interest rates.
A second factor is the U.S. economy, which has grown at roughly 2 percent in the past few years. Investors have gradually gained confidence that the economy is in recovery, albeit a relatively weak one. The continued progress in the economy has caused investors to become more bullish on the stock market, which has resulted in a “rotation.“ A rotation occurs when investors start to sell one form of security, and start buying into another form. In this case, investors are starting to buy more stocks in anticipation of greater corporate profits, and are starting to sell bonds in fear of an accelerating economy, which generally leads to higher interest rates, and therefore lower bond prices. This bull market for stocks has been under way for several months now with the Dow Jones industrial average near its record high.
Putting aside any major crises such as a new war, a further collapse of the European economy, or a major shock to the financial system, it is reasonable to expect a gradual increase in mortgage rates for the rest of 2013. If the economy continues to bumble along at a modest 2 percent growth rate, corporate profits will continue to grow gradually, and confidence will slowly but steadily continue to strengthen.
This will lead to an increased demand for stocks, a decreased appetite for bonds, and therefore gradual increases in mortgage rates.
The bottom line: I expect mortgage rates to remain under 4 percent for most of the year, but to tick up during the year by 0.25 percentage point to 0.5 percentage point as the economy continues its modest but gradual ascent.
If the economy starts to take off, expect mortgage rates to spike even higher as the bond markets anticipate higher levels of inflation. If we have a political or economic crisis, such as a severe impact from the budget “sequester,“ expect mortgage rates to return to their historic lows.
I hope this helps as you ponder whether to buy that new home, or whether to refinance your existing mortgage. Visit my blog at MortgageRates.us for a more detailed analysis of just how low rates are from a long-term, historical perspective.
We are in a very unique period of super-low mortgage rates. Even if rates move up a bit this year, as I’m predicting, we are experiencing such a low interest-rate environment that we will look back on this period, down the road, with pure amazement.
ON THE WEB:
-Have US mortgage rates hit bottom? http://www.mortgagerates.us/have-us-mortgage-rates-hit-bottom/
-Average mortgage rates: http://www.freddiemac.com/pmms/release.html
-National Association of Realtors home-price report: http://www.realtor.org/topics/metropolitan-median-area-prices-and-affordability/data
Tom Reddin, former president of LendingTree, writes for the Charlotte Observer about mortgages and home ownership. A version of this column previously appeared on his blog, MortgageRates.us. He runs Red Dog Ventures, a venture capital and advisory firm for early-stage digital companies.