Mortgage Rates in 2009: 7 Things You Need to Know
A look at where rates on home loans are headed in the New Year
By Luke Mullins
Posted December 11, 2008
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.
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Rates have already become increasingly attractive. The average national rate for 30-year fixed mortgages fell to 5.57 percent in the week of December 5, from 6.61 percent 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 5½ percent, says Keith Gumbinger of HSH Associates. From there, they will "wax and wane" in the 5½-to-6 percent range, before closing out the year somewhere between 6 and 6¼ percent. "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.)
There are thee main factors behind the outlook:
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 percent in October from the previous month, a sharp decline from the 0.3 percent 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—like 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 downward. "The sudden collapse in prices has changed things dramatically," says Gumbinger. "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 last month 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 percent in our forecast versus 2.7 percent 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—like stocks—to ultrasafe government securities. Such forces are already bringing yields on government bonds sharply lower. Ten-year treasury yields fell to 2.66 percent during the week of December 5, from 4.02 percent 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.