Why is this happening?

We like it when experts are wrong about their predictions.

We have been warned for many months that mortgage rates will likely rise this summer and loans near 6 percent will be the norm. Fortunately, the experts made these predictions before knowing a European debt crisis would hit and investors would flee to into the U.S. bond market for safety.  Because of this, mortgage rates are incredibly low and rates could go as low as 4.5% this summer. The Wall Street Journal reports:

“A general rule of thumb holds that every one percentage point decline in mortgage rates is the equivalent of roughly a 10% reduction in the home price for the buyer. So, if the current rates hold, say economists, that could help stabilize prices and allow current homeowners to sell existing homes without substantial price cuts.”

  • Matt Carter

    It’s true that hardly anybody expected mortgage rates to go DOWN after the Fed wrapped up $1.25 trillion in purchases of mortgage-backed securities in March. But the long-term outlook — that rates have nowhere to go but up — is essentially unchanged.

    Economists at the Mortgage Bankers Association and Fannie Mae weren’t predicting a sudden rise in rates this summer — on May 12, the MBA forecast projected that rates on 30-year fixed-rate mortgages would rise to an average 5.2 percent during the three-month period ending in June, and to 5.4 percent during the following quarter, which ends in September.

    That forecast projects that rates on 30-year fixed-rate mortgages will continue a gradual rise for the next 2 1/2 years, averaging 6.3 percent in the final quarter of 2011 and 6.6 percent in the last three months of 2012.

    Here’s something to think about: If you’re able to buy a home with a 30-year fixed-rate mortgage carrying a 4.5 percent interest rate this summer (which already seems a little far-fetched), what happens if you want to sell it in three years, and mortgage rates are back up to 6.6 percent (or higher)?

    If a one percentage point decline in mortgage rates increases a homebuyers’ purchasing power by 10 percent, a 2 percent increase in mortgage rates will DECREASE their buying power by about 20 percent. That’s likely to have an impact on home prices.

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