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Experts' forecasts of rising rates: Just hot air?

Feeling hoodwinked because you panicked and got a mortgage at 4.5%? Rates jumped this summer, but the mini-bubble wasn't sustainable and rates fell.

By Marilyn Lewis Sep 27, 2013 10:22AM

Image: Arrow Up Green (© Image Source/SuperStock)Did you succumb to the panic this summer over rising rates and get a mortgage at 4.5%?


I know I did, and I'm not happy about it. Borrowers this week paid an average of 4.32% for a 30-year fixed rate mortgage, according to Freddie Mac. The drop this week, from 4.5% last week, was "the biggest one-week mortgage rate improvement since June 2009," according to mortgage blogger Dan Green.


Zillow's survey found rates at 4.17%. Grrr. Was I suckered into panicking and buying high by all the experts predicting rates would just keep on rising? In just one week last summer, June 20 to June 27, the average rate on a 30-year loan shot up a half percentage point, from 3.93% to 4.46%. Wouldn't you know it? That was the week I signed on the dotted line.


What happened?

Experts are saying that rates fell this week because of the Federal Reserve's Open Market Committee's announcement, Sept. 18, that it will keep on stimulating the economy -- and keeping rates low -- by buying billions of dollars more in mortgage-backed securities and Treasury securities.


"The Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases," the committee said. The plan is to continue pumping up the housing market until it's better able to stand on its own.


I'm happy for the few remaining Americans who can refinance and have not done it yet. And for the relatively small numbers of people buying homes right now. But knowing that I'd succumbed to fear that rates would keep rising and that I'd bought into a small bubble made me want to know more.


The summer's mini-bubble

I phoned Richard Booth, a certified mortgage banker whom I'd talked with when I was making the refinance decision. He had told me then that there was a good chance the sudden rise in rates was temporary. If I could hang on, he'd said, rates might fall back. But I felt nervous and wanted to move ahead with my refi.


Booth and I talked by phone this week. "Here's your chance to say, 'I told you so,'" I told him. He kindly declined to rub it in. "A lot of folks got caught in the same pinch you did."


He explained what he'd been thinking back in July. "The housing mini bubble was a result of pent-up demand, not a true recovery," he said. "There was a lot of favorable news coming out about the housing market's recovery, that home prices were going back up again.


"My thought, which was shared by a lot of other people in the industry was, 'This is all speculation. When you look at the employment numbers, consumer confidence and housing sales, the numbers aren't there.'"

The media, weary of bad economic news and looking for good news about housing, got too excited about the summer's rising home sales and prices than was justified. Great. The enemy turns out to be me, or at least my colleagues.


In Booth's opinion, it's too soon to call the housing slump over. To him, rising home prices mostly reflect a scarcity of homes for sale in the hottest markets and pent-up demand from the recession. Exciting, but not sustainable.

MIA: First-time buyers

What's needed is lower unemployment, bringing the national rate from the current 7.3% to between 5% and 6%, which the Federal Reserve considers normal. We've made strong progress from the sickening high of 10% unemployment reported by the Bureau of Labor Statistics in October 2009. But it's not time to party yet.


The crucial plays in the recovery are first-time homebuyers. The economy won't be OK until they're OK, Booth says. First-time buyers have historically made about 40% of home purchases, on average, over the past 30 years. Today, they're just 30% of the market, The Wall Street Journal reports.


"They can't find jobs. They're saddled with huge student loan debt. They're postponing their first home purchases, which is extremely alarming for anyone in the (housing) business," Booth says.


Without those first-time buyers, "you just get stuck at a marginal recovery environment," Steven Ricchiuto, chief economist with Mizuho Securities USA Inc., told The Journal.


More from MSN Money:


Sep 27, 2013 1:18PM
Finally, a bit of sense to temper the euphoric reporting on the housing market. Prices have been driven up entirely by artificial scarcity and artificially low rates. Both of those factors will return to normal within a few years. What will happen to housing prices?

In my opinion, current prices in many markets are unsustainable, and will likely drop unless the employment rate and median income improves, and improves a lot.

Think about this scenario. When the Fed stops its bond buying program, mortgage rates will jump to about 6%, even if the Fed funds rate stays at 0% (which has to eventually go up too). The P&I on a $200,000 mortgage at 3.5% is about $900/mo, but jumps to about $1200/mo at 6%.

If you bought the house with a 3.5% mortgage, but then need to sell a couple of years later, somebody else would have to buy it with a 6% mortgage. One of two things has to happen: they either need to accept higher payments than you did (higher income), or you need to lower the price. 

If median incomes don't change, the price would have to be lowered to $150,000 to have the same $900/mo for P&I.

Buyers beware.
Sep 30, 2013 7:26AM
I agree with some of the others that the spread you illustrate is minimal.  When I was in the borrowing game, I wouldn't borrow more than I could pay off in 15 years.  I would take out a 30 yr. loan, but rather than make the "minimum suggested monthly payment" I would pay an amount equivalent to a 15 or 20 year amortization.  Then I would also make additional principal payments with any "found" money that came my way such as a bonus or tax refund.  A favorite was my emergency fund, which I contributed to monthly.  If at the end of the year it had more than six months of expenses, I would send the excess to my mortgage.  My last mortgage lasted seven years before I ended it.
Sep 27, 2013 1:46PM
The FACT is-- rates under say... 6% are literally lethal to lenders. Your Annual Percentage Rate is a rate, not a yield. Once the loan enters the Secondary Market (as an investment), those lower rates don't generate enough yield to exceed the cost to service them. In the early 1960's rates were like they are today. A 30-year paid off in 1990. Remember the 1980's? Banks were being killed by the lack of yield. Who would refi if you had such a rate... especially if you held it while rates climbed? It shouldn't surprise people to hear those stupid media commercials and gimmicky banner ads that tell you to refi before rates go up. The FACT is... a refi is really a reset. You start the lender's yield off at the top again. You really don't gain much or anything unless you cut the term or cashed out. We aren't in a good financial place right now. Do yourself a favor... ignore "experts" who tell you to buy or invest in any aspect of the financial sector. Instead... get a good book on money management and budgeting and design your own plan. One sure fact, if you want to get rich, get out of debt first. 
Sep 27, 2013 12:47PM
Rates fluxuating 0.5% is not volatility.  Back in the day when the economy was good they would fluxuate between 7% and 7.625% all the time.  No difference.

If they shoot up to 6% and then go back to 4%, perhaps this would be a better definition of volatility. In the interim, were talking about $50 per month here.  If you cant afford that, don't buy a house!

FHA has sold all of it's high end loans to the Federal Reserve and I can prove it.


FHA only has 40,000,000 homes out of 2009 census of  139,000,000 homes


It is carrying only 30 billion to cover it's loans -- at 2 percent mutliply by 50 to get how much in loans they are covering and you get 1,500 billion


Now divide 1,500,000,000,000 by 40,000,000 and you get each house on average the average loan is only $37,500 dollars. Hard to do with average home now going for $250,000 unless you have cherry picked the almost pais off loans. So where did all the other 100,000,000 home loans go?? Sure maybe 40,000,000 are paid for out right but that still leaves 60,000,000 homes.


Quote "

The agency, which insures 40 million home mortgages, is struggling with $5 billion in losses on its reverse mortgage program.

Reverse mortgage borrowers, who must be 62 or older, can take lump-sum or monthly payments. They still must pay property taxes and insurance. Sale proceeds from a home go to the lender when the borrower dies or moves out.

The FHA suffered big losses when many borrowers took large payments up-front and later ran into financial problems, often due to falling home values during the financial crisis.

The agency has sufficient cash to pay insurance claims against mortgage defaults, Galante said, citing more than $30 billion in cash and investments on hand, Galante said.

"These are more than sufficient resources to allow FHA to fund its claim activity," she wrote.

The FHA is required by law to maintain reserves equal to 2 percent of the total amount of home mortgages it insures. The 2 percent capital reserve ratio is aimed at covering projected losses over the next 30 years in the agency's Mutual Mortgage Insurance Fund."

Sep 27, 2013 1:02PM
With homes at 200K +   

Rates should be no higher than .05% - 1.0 % max....just say'en
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