Say “Goodbye” to sub-5 percent Mortgage Rates?

June 5, 2009 by Danilo Bogdanovic  
Filed under Mortgage/Lending

are-mortgage-rates-going-up

Mortgage rates are ridiculously low right now. Words such as “historically” and “unbelievably” are being put in front of “low rate of…” by lenders, the media and consumers alike. But that may changing. And quickly.

Mortgage rates have already gone up well over half of a point in the past few weeks and are over 5 percent. Heck, mortgage ratest recently went up half a percent in just one day! The increase in mortgage rates could be a sign of things to come.

Why? Because mortgage rates are artificially deflated. That’s right, I said it – artificially deflated.

The government has been pumping money into the markets to artificially keep rates down in order to stimulate the housing market and keep the entire US economy from collapsing. Aside from this infusion of borrowed money, there is very little, if anything, that justifies rates being this low.

Here are 3 major issues with what’s going on right now…

  1. The government is running out of money to pump into the market. Once there’s no more to dump into the market, you’ll see rates increase almost immediately (funny how the government is starting to run low on cash and rates are already on the rise)
  2. The more the US goes into debt by pumping borrowed money into the market and buying up mortgage backed securities (MBS), the more interest rates will go up in the future (for a variety of economic reasons). This problem will be even greater if the government now borrows even more money to keep mortgage rates down even longer (which they’ve already done a few times)
  3. The government can only buy so many MBS and once they can’t buy any more, the MBS have to be sold on the traditional secondary market and investors. Investors are becoming less and less eager to buy MBS at such low rates and will stop buying them up until they come with a higher rate of return (aka higher mortgage rate)

Many (including the government) have previously said that rates would stay low for the remainder of 2009. But even some of those folks are starting to question that theory and are now saying that rates will start to rise well before the end of 2009 – as they’re already doing (see the following chart courtesy of BankRate.com).

national-30-yr-fixed-rate-mortgage-rates-bankrate1

Nobody has a crystal ball and can say what will happen with certainty. But many signs point to a low chance of rates going down from here or staying put and a much greater chance of them going up. We could very well be in the perfect storm and see 6 or even 7+ percent mortgage rates by the end of the year.

Related Articles

Rates Rocket Up Quickly – BankRate

Mortgage Rates Rising – CNN Money

Mortgage-Backed Securities, the Fed, Ben Bernanke and more – Mortgage News Daily

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