Dark clouds on the rates horizon.
December 15, 2009 11:06 AM   Subscribe

The NY Times predicts a dramatic increase in mortgage rates come March, with rates climbing to 6 percent or higher. Ouch. Arguments for or against?

In an article on December 13, the NY Times suggested that American interest rates would spike dramatically due to the expiration of a Federal program.

To save you the hassles of clicking, here's the meat:

"Rates went above 5 percent in 1952 and stayed there — until this year.
"The super-low rates are not likely to last much longer. The Federal Reserve program that has driven rates to such lows, which involves buying $1.25 trillion in mortgage-backed securities, is scheduled to expire in March, and Fed leaders have said that it would not be renewed.
"Some analysts believe rates could jump as high as 6 percent in the spring. On a $300,000 mortgage, such a jump would cost an extra $225 a month."

Now, NY Times articles (especially of late) tend to the sensational, and I'm aware that this prediction is likely skewed. There's much more to the picture than what is printed here. But even so, it could be a costly proposition for people with adjusting mortgages, or those who are planning a refinance or new mortgage in the second half of 2010.

What I'd like to know is, to what extent is this prediction of rate increases common to the media at large, and not just the Times? Is this widely perceived to be an accurate assessment? Are there any arguments against a definitive rate hike after the expiration of the Fed plan?
posted by Gordion Knott to Work & Money (4 answers total) 5 users marked this as a favorite
Bankrate's panel doesn't forecast out that far, but I'd check them every week to see what develops.
posted by djb at 11:51 AM on December 15, 2009 [1 favorite]

There is a whole lot going on in this question so let me try to break it down into discrete points.

(Apologies for the length of this, but there is some background detail that follows which the NYT does not provide and which is likely pertinent to the question of whether rates will increase in the future.)

(1) The NYT article doesn't seem to account for the tax deductibility of interest. If interest rates increase you are paying more in interest but that increased amount of interest paid is still tax deductible (generally speaking), so it's not clear that the extra, say, $225 per month is an expense with no benefit.

(2) There is a very valid line of criticism about home ownership which revolves around its various risks. One of those risks is the inherent uncertainty about future interest rates. Given that Adjustable Rate Mortgages (ARMs) are generally cheaper than fixed rate mortgages (the borrower is essentially "paying" for the benefit of lower interest rates by exchanging low initial costs for the possibility of rate increases down the road), many people take on ARMs. See here for more on the question of whether real estate investment ought to be encouraged by the government (and click through to the other links).

(3) The US Federal government, and by extension, the Fed, has for a very long time (at least since the end of WWII) adopted an explicit policy of encouraging home ownership. One of the ways that they have done this is to keep interest rates (again, generally speaking) very low: this makes financing cheap and allows home buyers to use a lot of leverage, which, in turn, keeps housing prices (artificially) high.

(4) And now to the question: what is the likelihood of rising interest rates? Well, given the amount of money the US government has spent recently, and given that it wants to continue spending money for the foreseeable future (healthcare, wars, pension schemes, etc.) it will have to print yet more money. This leads to either inflation or default. So, yes, mortgage rates likely will rise at some point in the future. When, exactly, and by how much, I have no idea.
posted by dfriedman at 12:14 PM on December 15, 2009

Mortgage interest rates depend on the following three things:

1- How many people are looking for mortgage money.
2- How much money is out there looking to be invested.
3- The return on other investments.

They all intertwine together, but mostly the return on other investments thing. If someone can buy (made up example) savings bonds at 8% a year, why in the world would they loan you money for less than that?

That is, unless those investments dry up.

And/or, if there is more demand for loans than there is money available, they will raise rates until that equalizes.

And there are other things to consider, which is for example some bank needing to make their numbers for the quarter, so they offer cheaper loans for a few weeks to spur people into borrowing money.

And then there are artificial ups and downs to the market- rates might go up, but the demand for loans might go down because the first-time-buyer tax credit goes away. Which might balance things out.
posted by gjc at 7:20 PM on December 15, 2009

It seems really likely to me that mortgage rates will rise, significantly, sometime in the not very distant future, just based on historical rates over the past 50 years. As far as I can see, current rates are artificially low, due to government intervention, and they can't stay that way indefinitely. Whether the increase will come next spring or 3 or 5 years from now is much harder to say for sure.
posted by kristi at 10:12 AM on December 18, 2009

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