2010 Home Price and Mortgage Rate Outlook: 5 Things to Know

Amid growing optimism about a recovery, economists from some of the nation's largest banks have unveiled their outlook for mortgage rates, home prices, and economic growth through the end of 2010. The American Bankers Association's Economic Advisory Committee—which is made up of top economists from financial firms across the country—predicts that the recession will come to an end in the third quarter of this year, despite high unemployment and uncomfortably large federal deficits. "The impetus of the recovery as we see it comes from two key sources," Bruce Kasman, the chief economist for JPMorgan Chase, said at a press conference yesterday. "The first is the successful steps taken to contain the financial crisis ... and the second point is that the consumer has stabilized during the first half of the year." Still, the group expects a sluggish recovery with slower than normal growth through spring 2010.

Here's what the bankers believe is in store for the real estate and mortgage markets:

1. Whither the bottom? The committee expects that today's more affordable home prices and low mortgage rates will help the housing market finally hit bottom in the coming months. Scott Anderson, a senior economist at Wells Fargo, says that home sales are "tantalizingly close" to stabilizing. "Sometime this summer I think we will see [them] bottoming out," he says. Home prices, however, won't hit bottom until early 2010, Anderson said. "It's really just a question of absorbing the supply of vacant properties," says Dana Johnson, the chief economist at Comerica Bank. "We are making headway, but we have some work to do." Anderson expects home prices at the national level to fall another 5 to 10 percent before stabilizing.

[If you're in the market for a house, this search tool can help you find your best place to live.]

2. Mortgage r ates: Although 30-year fixed mortgage rates are up from the all-time lows reached earlier this year, they should remain in the low 5 percent range for the next three quarters, the committee projects. They predict that rates will average 5.25 percent in the last month of the next two quarters before inching up to 5.28 in the first quarter of 2010 and hitting 5.50 percent in the following quarter. This projection of a continued period of extremely low interest rates comes not long after a sell-off in the bond market helped push mortgage rates sharply higher. Yields on 10-yeartreasury notes, which fixed mortgage rates typically track, have surged recently on concerns about the massive amount of government debt needed to finance the Obama administration's huge bailout and stimulus plans. As a result, mortgage rates jumped from 5.03 percent on May 26 to 5.79 percent on June 10, according to HSH.com. (In recent days, however, rates have retreated, falling to 5.55 percent yesterday, according to HSH.com.) Some worry that these pressures could prod mortgage rates even higher in the near future.

[See Mortgage Rates Head for 6 Percent: 5 Reasons They Might Retreat.]

The committee, however, took a different view. The bankers expect lower inflation to keep 10-year treasury yields—and therefore mortgage rates—in check. The sell-off in the bond market "has been severe," Kasman says. "But [it] is not likely to continue in an environment in which growth will turn positive but not extremely strong, in a world in which inflation will be lower, and in a world in which the Fed will continue to maintain policy rates at close to zero percent for some time to come."

3. Unemployment: The unemployment rate is expected to peak in the first quarter of 2010, but it will remain uncomfortably high for some time. "We do forecast the unemployment rate to peak at around 10 percent and not get below 9.5 percent at any point in 2010," Kasman says. "That is higher than what we see today." An unemployment rate of above 9 percent would represent a stiff headwind for the housing market. It suggests that many would-be home buyers may remain worried about losing their jobs, making them less inclined to buy a house.

4 . Fed funds hike: The committee predicts that the central bank will hold the federal funds rate in its current range of zero to 0.25 percent until the third quarter of 2010, when the effective federal funds rate will increase to 0.5 percent. "As the economy recovers, there is going to be less slack going forward, and the potential for inflation pressures to start to build," says Scott Brown, chief economist at Raymond James. Still, "I don't think they want to shock the markets by raising rates rapidly," Brown says. Instead, the central bank will gradually increase rates, he says.

5. Lending standards : Kasman expects bank lending standards to become less constrictive over the next year. "It's hard to put a number on it," he says. "[But] the direction is towards improvement to some degree in credit markets over the next 12 months."