Why Mortgage Rates Will Fall In 2013

For much of the past year mortgage rates have bounced around at or near record lows. But as we head into 2013 will mortgage rates go higher or fall?

Just last week Freddie Mac reported that “the 30-year fixed-rate mortgage has averaged below 4.00 percent all but one week in 2012, while the 15-year fixed-rate mortgage has averaged below 3.00 percent since the last week in May.”

Rates for 30-year mortgage loans are 3.32 percent plus .8 points at this time, said Freddie Mac,  just .1 percent above the lowest mortgage rate ever recorded.

But what is the real cost of a mortgage at, say, 3.375 percent? The borrower pays 3.375 percent per year on the outstanding balance but the borrower is paying with paper dollars. The inflation rate in October was 2.2 percent so the real cost of the loan after inflation was 1.175 percent.

But wait. Imagine that the interest is deductible and that between state and federal taxes the borrower is in the 25 percent bracket.  That means 25 percent of 3.375 percent — or .84 percent of the loan amount — is actually a tax write-off. So, 1.175 percent less .84 percent means the real cost of the loan after inflation and taxes is just .34 percent.

 But How Will Mortgage Rates Change?

The big question of course is what will happen in 2013. No doubt you can find armies of economists, soothsayers and fortune tellers who are prepared to argue that rates will rise — and an equal number of such authority figures will claim that rates are about to fall into an even deeper pit.

Since picking rates is a lottery of sorts with a 50-50 chance of winning I want to play. Sign me up with those who think that rates are about to fall from ridiculously low to ridiculously lower. Here’s why:

Mortgage rates are generally the result of supply and demand. Right now there is enormous supply and funds worldwide are coming to the United States because investments here have less risk than investments just about anywhere else. While the natural movement of supply and demand might change, at this particular time we have another factor in the marketplace that impacts rates.

That factor? The Federal Reserve. It’s been purchasing additional mortgage-backed securities (MBS) at the rate of $40 billion per month since September. More money in the system means lower rates.

Dr. Jeremy C. Stein, a Federal Reserve Governor and previously a Harvard economics professor, says since the Fed’s $40 billion a month plan was introduced on September 13th mortgage rates have dropped .20 percent.

So where are mortgage rates headed in 2013? Watch the Fed. To keep inflation at 2 percent or thereabouts it will continue the purchase of mortgage-backed securities at the rate of $40 billion per month — and that’s why mortgage rates are likely to remain stable or fall even further.

How long will the Fed continue it’s MBS purchases? At least through November 2014, not that politics could possibly be involved….


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