After Record Lows, Mortgage Rates Headed Up in 2010

Mortgage rates have inched upward in  the last weeks of 2009, and that trend will continue through 2010. The question is how high they will go.

"If you told me by the end of 2010 a 30-year rate was at 6 percent, that sounds about right," says Mark Zandi, chief economist at Moody's. "I don't think there's any question rates are headed up."

Rates are still historically low heading into the new year. The average fixed rate on a 30-year mortgage was 4.94 percent the third week of December. But that's higher from the record low of 4.71 percent the week of Dec. 3.

So far, it's turned out to be a case of nowhere to go but up, says Lawrence Yun, Chief economist at National Association of Realtors.

"Rates weren’t going to stay that low forever," says Yun. "But I don't see anything too alarming. Rates will still be considered attractive."

If rates seem higher, buyers and sellers need to keep them in perspective, says Jim Gillespie, president and chief executive officer of Coldwell Banker. "I started selling real estate in 1975 when rates were at 7 1/4," Gillespie says. "In the 1980’s they were 17 or 19 percent. You have to go back to 1940's to see the rates we have now."

Current mortgage rate increases stem from several causes. One crucial component for keeping rates so low has been the Federal Reserve's purchases of nearly $1.5 trillion in mortgage-backed securities and giving billions of dollars in support to mortgage buyers Freddie Mac

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But all that Fed money is scheduled to evaporate in March of 2010, and the Obama home buying tax credit, which has helped spur sales, ends next April.

"The ending of the Fed program will definitely effect rates," says Mark Goldman, professor of real estate at San Diego State University. "So far, the Fed has not expressed interest in keeping the program going. That could raise rates by some 150-200 basis points."

There's also inflation. A recovering economy and a Fed concerned about rising prices could also cause mortgage rates to heat up.

"I think there's the possibility of some Fed tightening and driving up long-term mortgage rates," Zandi says. "Inflation is the key. Inflation is still low, but if it starts up, the Fed may be forced to play its hand in raising rates."

Then there are bond investors and what they can do to the mortgage market, Zandi says. "They are thinking 2011 and 2012. If they question the long-term fiscal situation and the deficit and don't buy bonds, that may also start to drive up long-term rates."

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