Mortgage rates will rise next year, but slowly
MBA forecast predicts rates will average 4.1% in 2013
By Amy Hoak, MarketWatch
CHICAGO (MarketWatch)—After reaching record lows in 2012, mortgage rates are expected to creep up slowly in the year ahead, the Mortgage Bankers Association predicted on Tuesday.
Rates on the 30-year fixed-rate mortgage are expected to average 3.8% in the fourth quarter of 2012, rising to 3.9% in the first quarter of 2013 and eventually rising to an average 4.4% by the fourth quarter of next year, the MBA said. The mortgage is expected to average 4.1% for all of 2013.
Granted, in these times, mortgage rates are increasingly difficult to predict. So take this forecast with a grain of salt.
Last year, the MBA rate forecast was way off. It predicted the 30-year fixed-rate mortgage would average 4.4% for 2012. Instead, rates plunged and hit an estimated annual average of 3.8%, spurring a flurry of refinance activity.
Underlying factors that economists would normally look at as those driving interest rates, including inflation, aren’t driving rates now, said Jay Brinkmann, MBA’s chief economist, during a Tuesday briefing with reporters at the association’s annual Convention & Expo in Chicago. Instead, it was uncertainty in European economies and actions taken by the Federal Reserve that moved rates so low this year.
In fact, continuing purchases of mortgage-backed securities through the Federal Reserve’s QE3 program will likely keep the 30-year fixed-rate mortgage below 4% through the middle of 2013, he said.
“The Fed has committed to buying $40 billion of agency mortgage-backed securities per month until the labor market shows significant signs of improvement,” he said. “Based on MBA’s originations estimate, the Fed will be buying 36% of all mortgages originated in 2013, and a much higher percentage of those swapped into agency mortgage-backed securities.”
Despite the Fed commitment to an open-ended purchase program, the MBA forecast assumes the program will last 12 to 18 months, said Mike Fratantoni, MBA’s vice president of research and economics. The “aggressiveness, open-endedness and focus on the mortgage market” that came with QE3 led to the highest refinance volume in four years, he said.
In the meantime, high refinance activity will likely carry over into next year.
“Applications that come in November we aren’t going to see close until sometime after the first of the year,” Brinkmann said. The “long tail of refis” will extend through the middle of the year then drop off, he said.
Indeed, things are looking at least somewhat better for the industry.
Mortgages to finance a home purchase are expected to rise by 16% in 2013, compared with 2012, as the economy grows modestly and more owner-occupied home sales occur, as opposed to cash purchases by investors, Brinkmann said.
Also helpful to driving home purchases are the 1.5 to 1.8 million private-sector jobs expected to be created next year, though the growth is below what would be needed for a “robust” home-sales market, he said.
Single-family housing starts are expected to reach 586,000 in 2013, up from 527,000 in 2012, according to the forecast. The median existing-home price is expected to rise to $186,000 next year, from $179,400.
While the improvement may be slow, it’s also worth pointing out that the country has added 4.8 million renter households since the end of 2006, while losing 1.7 million owner households, according to the MBA. And that net household growth could spell home-buying demand in the future.
“People with jobs are moving on their own some place,” Brinkmann said. And while some of them might be renters now, “eventually we would expect some of that household formation to go into homeownership.”