Mortgage Rates Will Rise In 2013, But Slowly

Mortgage rates reached record lows in 2012, but are expected to increase in the coming year, the Mortgage Bankers Association (MBA) predicted recently.  The positive news is that the rates are expected to rise slowly.


As Reported by Market Watch, the MBA forecast for 2013 is for rates on the 30-year fixed-rate mortgage 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 of 4.4% by the fourth quarter of 2013. The mortgage rate is expected to average 4.1% for all of 2013.

It is important to remember that this is just a prediction, and mortgage rates are increasingly difficult to predict.  Be aware that it is generally agreed that mortgage rates will soon begin to rise slowly, assuming no new more restrictive regulations are put on the mortgage industry, and FHA and/or Fannie Mae/Freddie Mac do not significantly tighten their credit policies, in which cases, the rise in rates could be accelerated.  However, whether rates hold steady, fall even lower, or start climbing, from a historical perspective, a 30-year fixed rate mortgage rate below 6% is still a very attractive rate.

Jay Brinkmann, MBA’s chief economist, during a recent briefing with reporters at the association’s annual Convention & Expo in Chicago, said that the underlying factors which economists would normally look at as those driving interest rates, including inflation, are not driving rates at this time.  Instead, it was uncertainty in European economies and actions taken by the Federal Reserve that have recently moved rates so low.

In September of 2012, the Federal Reserve announced plans to implement additional stimulus, in its third attempt at a controversial program to rev up the U.S. economy.  The policy, known as Quantitative Easing, and often abbreviated as QE3, entails buying $40 billion in mortgage-backed securities each month until the labor market shows significant signs of improvement. The end date remains up in the air, as the Fed will re-evaluate the strength of the economy in coming months.  The MBA estimates that the Federal Reserve will be buying 36% of all mortgages originated in 2013.

In fact, Brinkmann said that 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.

Despite the Federal Reserve’s 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.  It is expected that high refinance activity will likely carry over into the middle of 2013.

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 (as opposed to cash purchases by investors) occur, Brinkmann said.  Although the growth is below what would be needed for a “robust” home-sales market, he said.  The 1.5 to 1.8 million private-sector jobs expected to be created next year is also expected to drive home purchases.

Single-family housing starts are expected to reach 586,000 in 2013, up from 527,000 in 2012. 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.  That net household growth could spell future home-buying demand.

“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.”

Bottom Line: Things are looking at least somewhat better for the industry, and if you are considering a refinance or a home purchase, it would probably be better to do it sooner rather than later.