Growing Economy Means Higher Rates

Mortgage interest rates have been historically low for a long time, but expect them to start climbing soon.

May 1, 2010

Thirty-year fixed rates may rise to 6 percent by December and to about 6.5 percent at the end of 2011; rates were at about 5 percent in early April.

It’s tempting to think the Federal Reserve’s recent pullback from mortgage-backed securities purchases will drive interest rates higher. 

But since it ended those purchases at the end of March, as it had planned to do, the impact on rates has been negligible.

By all appearances, private investors have filled the void and are absorbing the MBS supply, keeping rates down. Predictable macroeconomic factors—the continuing high U.S. budget deficit and the recovering economy—are the main reasons rates are likely to climb.

If the U.S. government has trouble borrowing and has to raise interest rates to attract investors to purchase U.S. debt, then the rest of the private sector will also have to pay higher interest rates. That’s set to happen unless the government can offer a credible plan for tackling its deficit seriously over the long term.

Meanwhile, as the economy continues to grow, so too will interest rates, as the growing economy pushes up the demand for credit.

On the positive side, relatively benign consumer price inflation will keep borrowing rates from rising too high. I don’t foresee the mortgage rate going above 7 percent, at least for a prolonged period, in the next two years.

Of course, if you’re in the jumbo home loan market, you’re already seeing 7 percent rates. But that stems from lack of government guarantee, and we can expect to see the spread between those rates and conventional mortgages narrow as lenders stabilize.

For conventional mortgages, rates will head up, at least modestly, but the increase comes in the context of a growing economy, and that’s a welcome sign.

Lawrence Yun
Chief Economist and Senior Vice President of Research at the National Association of REALTORS®

Yun oversees and is responsible for a wide range of research activity for the association including NAR’s Existing Home Sales statistics, Affordability Index, and Home Buyers and Sellers Profile Report. He regularly provides commentary on real estate market trends for its 1.3 million REALTOR® members.

Dr. Yun creates NAR’s forecasts and participates in many economic forecasting panels, among them the Blue Chip Council and the Wall Street Journal Forecasting Survey. He also participates in the Industrial Economists Discussion Group at the Joint Center for Housing Studies of Harvard University. He appears regularly on financial news outlets, is a frequent speaker at real estate conferences throughout the United States, and has testified before Congress. Dr. Yun has appeared as a guest on CSPAN’s Washington Journal and is a regular guest columnist on the Forbes website and The Hill, an “inside the beltway” publication on public affairs.

Dr. Yun received his undergraduate degree from Purdue University and earned his Ph.D. from the University of Maryland at College Park.