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Peering into 2013: The Future of Mortgage Interest Rates

Downward spiral
2012 is coming to a close, and while most consumers are focusing on the holidays, the financial world continues on.

The past year has brought record-breaking numbers for the mortgage industry, offering potential buyers the opportunity to purchase and own a new home at a low mortgage interest rate.

But what does the future hold for the housing industry?

For the year 2013, Freddie Mac predicts five things will occur:

  1. Mortgage interest rates will remain low
  2. Home values rise
  3. Household formations up
  4. Vacancy rates move lower
  5. Less refinancing
Mortgage interest rates are currently at a 65-year low. The 30-year fixed rate is set to remain near record lows for the beginning of 2013, and then increase in the later part of the year. Although an increase is predicted, the fixed rate is not estimated to rise above four percent. The low mortgage interest rate, which will stay near the historically low rate, will impact next year’s housing market.

“In the single-family market, this means homebuyer affordability should remain very high in 2013 for those potential buyers with good credit history, stable income and sufficient savings,” Frank Nothaft, Freddie Mac vice president and chief economist, said to loans.org.

Each week, reports about the mortgage interest rates are provided. Since large changes are rare, the rates vary slightly from week to week. But they usually head in a similar direction.

The following graph, provided by Freddie Mac, illustrates the downward decline of mortgage rates throughout 2012. 



Freddie Mac predicted next year’s mortgage interest rates by reviewing the latest market data and analyzing announcements from Federal Reserve officials as well as projects of other forecasters.

Although recent reports show rates are increasingly straying from the record-breaking weeks of November, the increased mortgage interest rates will not harm home affordability for stable households.

“We expect single-family origination volume to come in close to $2 trillion in 2012, about a 30-percent rise from 2011, and then drop by about 15 percent in 2013 as refinance ‘burnout’ and somewhat higher mortgage rates during the latter half of next year lead to less refinance activity,” Nothaft told loans.org.

He continued, stating that the Federal Reserve’s QE3 (third round of Quantitative Easing) is expected to continue into 2013.

“With positive signs of economic and housing recovery in recent months – albeit tempered with come cautionary notes – there may be some easing on the Fed’s bond buying program, which will be a contributing factor to the rise in rates toward the end of 2013,” Nothaft continued.

All in all, the year is set to embrace more positive economic growth for the housing industry, fueled by low mortgage interest rates.

“The last few months have brought a spate of favorable news on the U.S. housing market with construction up, more home sales, and home-value growth turning positive,” Nothaft said in a press release. “This has been a big change from a year ago, when some analysts worried that the looming ‘shadow inventory’ would keep the housing sector mired in an economic depression. Instead, the housing market is healing, is contributing positively to GDP and is returning to its traditional role of supporting the economic recovery.”

The “shadow inventory” was not as bad as initially predicted because over the past few years, the overall flow of homes into real estate owned (REO) has remained steady. Gradual declines occurred, but only in some markets. Property flow into REO was assisted by foreclosure alternatives such as short sales.

Interest Rate Fluctuations

Mortgage interest rates are living, breathing things. They do not stay the same, nor do they change all at once. They rise and fall according to market demands.

The rates are impacted by multiple factors, but one of the main causes is investor demands. Consumers want to pay a low mortgage interest rate on their home, while still receiving high interest on their money accounts.

In the finance world, there are theorists that believe in the impact of federal funds on mortgage rates. Others disagree.

The federal funds rate is the rate that commercial banks charge themselves for overnight loans.

In reality, the correlation is present, but it is not direct. A change in the Federal Funds rate does not necessarily guarantee a mortgage interest rate change.

Nothaft said although federal funds are not directly tied to mortgage rates, the funds affect them indirectly. When short-term interest rates and lenders’ overall cost of funds are increase, the lenders pass some of the expense on to the borrower.

Other Housing Changes

But interest rates are not the only mortgage-related area that will change next year. Home values are also set to increase 2-3 percent. As with all real-estate pricing, overall prices depend on the neighborhood. Some neighborhoods will see an increase while other will experience a decrease in home values.

In addition, household formations are predicted to increase due to more consumers opting for independent living situations. The predicted decrease in unemployment will facilitate more household formations as more people become financially able to live alone. A net growth of between 1.20 to 1.25 million household is predicted for 2013.

The dismal sight of foreclosed homes is set to diminish further in 2013. Vacancy rates in both the apartment rental market and the single-family market have been down, a trend that has occurred for the past three consecutive years. One cause for fewer vacancies is because household formations have outmatched new construction numbers. In 2012, through the third fiscal quarter, net household formations totaled 1.15 million while completions of newly built homes for rental and sale purposes were fewer than 700,000.

The low vacancy trend is set to continue in 2013 and could lead to a decade low level of vacancies. This will likely cause a faster increase in rent inflation. 

But new construction will be positively impacted by these continuing rates. According to Freddie Mac, U.S. housing starts are up 25 percent in 2012, compared with 2011. Housing investment will add to economic growth in 2013 for the first time since 2005.

“Look for these same positive signs to spur an increase in multifamily lending and in the overall stock of available rental housing. Construction of rental apartments in buildings containing at least five dwellings began on about 200,000 units this year, the most in one year since 2008,” Nothaft said to loans.org. “Further, in the multifamily space, permanent financing on new completions, property transactions, and refinance of loans exiting from ‘lockout’ or ‘yield maintenance’ periods is expected to translate into a rise of 5 percent or so in dollar originations in 2013.”

The final change for the housing market is less refinancing. When mortgage interest rates are low, homebuyers are more likely to refinance. Although refinancing activity accounts for the bulk of the current residential mortgage market, it is set to decrease. The latter half of 2013 is predicted to bring slightly higher rates, and with it less refinancing.

Record low mortgage interest rates will continue to stimulate the economy in 2013. Although some consumers will suffer, such as renters, a thriving housing market is what the economy needs to continue its drive out of a struggling economy and into a more solid future. 

For additional information about the past, present, and future trends of mortgage rates, visit our more recent mortgage rates analysis.