Higher Interest Rates May Be on the Way

One thing in life is for sure...everything changes. We have been experiencing a sort of "perfect storm" for buyers over the past year. Home prices were the lowest we've seen since 2003, interest rates remained at historic lows, around 5% APR, and the government even got into the act by providing a tax credit to buyers.

It does appear that we may be seeing these factors begin to adjust. First, the feds $8,000/$6,500 tax credit goes away at the end of this month. Second, the sales prices in Norther Virginia have begun to stabilize, and even increase in the closer in areas like Arlington, Alexandria, and Fairfax County. The outer lying counties are also seeing things begin to improve in regards to home values. Lastly, it looks like we will begin to see a rise in mortgage rates over the next 6 to 18 months.

I've inserted an article from REALTOR magazine about where rates are going, and why.

Economy: Growing Economy Means Higher Rates
by Lawrence Yun
Chief economist of the National Association of REALTORS

Mortgage interest rates have been historically low for a long time, but expect them to start climbing soon.
By Lawrence Yun May 2010
Thirty-year fixed rates may rise to 6 percent by December and to about 6.5 percent at the end of 2011; rates were at about 5 percent in early April.

It’s tempting to think the Federal Reserve’s recent pullback from mortgage-backed securities purchases will drive interest rates higher.

But since it ended those purchases at the end of March, as it had planned to do, the impact on rates has been negligible.

By all appearances, private investors have filled the void and are absorbing the MBS supply, keeping rates down. Predictable macroeconomic factors—the continuing high U.S. budget deficit and the recovering economy—are the main reasons rates are likely to climb.

If the U.S. government has trouble borrowing and has to raise interest rates to attract investors to purchase U.S. debt, then the rest of the private sector will also have to pay higher interest rates. That’s set to happen unless the government can offer a credible plan for tackling its deficit seriously over the long term.

Meanwhile, as the economy continues to grow, so too will interest rates, as the growing economy pushes up the demand for credit.

On the positive side, relatively benign consumer price inflation will keep borrowing rates from rising too high. I don’t foresee the mortgage rate going above 7 percent, at least for a prolonged period, in the next two years.

Of course, if you’re in the jumbo home loan market, you’re already seeing 7 percent rates. But that stems from lack of government guarantee, and we can expect to see the spread between those rates and conventional mortgages narrow as lenders stabilize.

For conventional mortgages, rates will head up, at least modestly, but the increase comes in the context of a growing economy, and that’s a welcome sign.