Mortgage rates are expected to rise gradually as the Federal Reserve left a key short-term interest rate untouched Tuesday, but said it would wrap up $1.25 trillion in purchases of mortgage-backed securities this month.
In a statement, the Federal Open Market Committee said its target for the federal funds overnight rate will remain in the range of zero to 0.25 percent, as inflation is likely to remain "subdued for some time."
Although household spending is expanding at a moderate rate, the committee said it remains constrained by high unemployment, modest income growth, lower housing wealth and tight credit.
The Fed’s purchases of mortgage-backed securities (MBS) guaranteed by Fannie Mae and Freddie Mac have helped keep interest rates near historic lows in the last year.
Although the committee said the Fed will wind up its MBS purchases at the end of the month as planned, it has no immediate plans to sell off the bonds it’s purchased, which would put additional pressure on mortgage rates (see story).
In a forecast published Monday, economists with the Mortgage Bankers Association predicted that mortgage rates will rise gradually for the remainder of this year, and stay on an upward trajectory in 2011 and 2012.
The MBA forecasts that rates on 30-year fixed-rate mortgages will rise to an average of 5.4 percent during the second quarter and reach 5.8 percent in the final three months of the year. MBA economists expect the 30-year fixed-rate loan will average 6.2 percent in 2011 and 6.4 percent in 2012.
When mortgage rates reach 6 percent, that will "significantly slow refinance activity," MBA economists said in commentary accompanying their forecast, "but should not slow the modest housing market recovery we are forecasting."
The MBA predicts sales of existing homes will climb by nearly 4 percent this year from 2009, to 5.34 million, and reach 5.72 million in 2011. Sales of new homes are expected to bounce back from a record low of 372,000 in 2009 to 398,000 this year and 528,000 in 2011.
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