The government is ending a program that has kept interest rates low and housing-affordability levels high for months.
On March 31, the Federal Reserve will stop buying mortgage-backed securities from Fannie Mae and Freddie Mac, returning control of interest rates to private investors. For months, industry observers have predicted that once government supports are removed, interest rates will rise quickly, pushing many of the first-time buyers critical to housing’s recovery out of the market.
As the date for the Fed pullout approaches, analysts now generally agree that an immediate rate spike is no longer the likely result.
“We think there will be a significant increase in private demand (for mortgage-backed securities) to take the place of the Fed,” said David Berson, chief economist at PMI Group in Walnut Creek, Calif. Not enough to offset the Fed’s departure, he said, with rates possibly increasing a quarter of a percentage point, “but a significant one.”
Bankrate.com columnist Holden Lewis said rates are so low now – averaging 4.87 percent for a 30-year fixed this week – that an increase “is inevitable. But maybe they’ll rise gradually instead of jumping” April 1. The Fed says it will stop buying “by” March 31 instead of “at” the end of the month, meaning that it likely has reduced its purchases and rates haven’t risen, Lewis said.
Moody’s Economy.com chief economist Mark Zandi said rates will “drift” higher in summer and fall, with the half a percentage point the Fed’s action cut working its way back in – mainly because investors believe the government would return if they got too high.
For that reason, Philadelphia mortgage broker Fred Glick said rates wouldn’t change. “If the old buyers don’t come back, the Fed will intercede again to ensure rates during a continued slowly recovering economy will not go so high as to stymie a positive direction,” Glick said. Buyers of these securities “now see that the lenders have instituted rigorous standards to ensure that the Fannie Mae and Freddie Mac paper they are buying are very good loans,” he said.
On the other hand, said Holland, Pa.-based economist Joel L. Naroff, low rates are not sustainable, and “the only way to get the market to stand on its own is to get people to become realistic again about prices and rates.” Rates will likely rise, but “the level will still be historically low,” Naroff said.
When rates do rise, likely by year’s end, it won’t be because of the Fed’s action, but “natural macroeconomic forces” like a recovering economy and the high budget deficit, said Lawrence Yun, National Association of Realtors chief economist.
The possibility of renewed Fed intervention will likely prevent rate increases resulting from private investors demanding large risk spreads, said economist Brian Bethune of IHS Global Insight in Lexington, Mass. As a result, Bethune and IHS economist Patrick Newport believe, the rate will be at only 5.25 percent by the fourth quarter.
How are mortgage loan rates are determined?
