Mortgage Rate May Fall to 4.2% By End of Year: Economists

The 30-year mortgage rate could fall to nearly 4 percent by the end of the year as both the economy and housing market make a slow recovery, Bank of America-Merrill Lynch said.

Mortgage Rates Dropping
Mortgage Rates Dropping

Efforts to ease monetary policy combined with a general weakening of the economy will combine to send rates lower, the firm said in a research note to clients.

"We expect that disinflationary forces combined with overt quantitative easing from the Federal Reserve will push the 30-year fixed rate mortgage down from the current 4.85% rate to 4.2% by year-end," the firm said in a note from Bank of America-Merrill Lynch economists Gary Bigg and David A. Rosenberg.

A bottoming in housing still remains elusive, and unemployment rates in excess of 10 percent could hamper a recovery.

But the firm said the decrease in rates is likely to outweigh somewhat the rise in jobless claims, meaning that housing sales are likely to show improvement in the second half of 2009.

The analysts used trends on the Merrill Lynch Proprietary Housing Market Index to draw their conclusions .

"The expected fall in the mortgage rate offsets the expected increase in continuing claims, suggesting that the environment for home sales will improve over the remainder of the year," the analysts said. "However, sales are expected to remain sluggish and may not be sufficient to absorb the inflow of the supply of foreclosures..."

Housing has shown some modest signs of recovery lately, though foreclosures remain high and prices continue to drop.

Mortgage applications rose 4.7 percent last weekbecause of a jump in new purchases. Many of the recent surges in home loan applications have been due to refinancing efforts.

Also, Pulte Homes and Centex announced a merger that will create the largest home builder firm in the United States.

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  • Diana Olick serves as CNBC's real estate correspondent as well as the editor of the Realty Check section on CNBC.com.

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