Mortgage Rates Seen Below 6% Through 2010

The Mortgage Bankers Association has released its forecast for the housing market and economy.

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Even as mortgage rates remain near record lows, the Mortgage Bankers Association believes that the looming expiration of a key Federal Reserve program may increase home loan costs next year. Still, the MBA expects rates to remain extremely attractive throughout 2010, helping to juice home sales and insert a floor underneath real estate values. Here are five things you need to know about the MBA's 2010 economic outlook:

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1. Opposing forces: The MBA expects subdued inflation and high unemployment to put downward pressure on 30-year fixed mortgage rates next year. However, "there is a lot of uncertainty regarding rates immediately following the termination of the Federal Reserve's purchase of mortgage-backed securities," Jay Brinkmann, MBA's chief economist and senior vice president for research and economics, said in a statement accompanying the economic outlook's release. "No doubt the Fed will do its best to minimize adverse effects, but the elimination of these purchases will put upward pressure on all long-term rates as well as the spread between mortgage rates and Treasuries."

2. Fed programs and rates: The Federal Reserve got into the business of driving down mortgage rates in November of 2008 as it scrambled to stabilize the free-falling housing market. To that end, it announced plans to buy up debt and mortgage-backed securities from Fannie Mae and Freddie Mac. In March of this year, it expanded the program to include the purchase of long-term treasury bonds and additional Fannie and Freddie assets. This asset purchase program is a key reason why rates have remained so attractive for nearly a year. Guy Cecala, publisher of Inside Mortgage Finance, says the program has brought rates roughly a full percentage point lower than they would be otherwise. Thirty-year fixed mortgage rates averaged 6.6 percent in mid-October 2008 but dropped below 5 percent by the first week of April 2009, according to HSH.com. (Rates for 30-year, fixed-rate mortgages averaged just over 5 percent last week.)

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3. Getting out: But as the housing market shows signs of stabilization, the Fed is looking to unwind some of this support. Its treasury-bond purchase program, for example, is expected to conclude by the end of the month. However, in the absence of a private market for mortgage-backed securities, the Fed moved in late September to extend its program for buying up these assets. Without committing additional funds to the initiative, the Fed said it will continue buying up debt and mortgage-backed securities from Fannie and Freddie through the first quarter of 2010. (The program had been scheduled to expire at the end of the year.) By remaining in the market, the Fed can help ensure that rates remain in an attractive range for a longer period of time. And rather than risk sharply higher mortgage rates, the Fed may extend the program again, depending on how the economy and housing markets perform in the coming months. "I don't think [the Fed asset purchase program] is going to end until it is not needed anymore," Cecala says. "If the housing market is clearly in the toilet still and [the Fed believes] that there is no private market around to support it, they will extend it as long as necessary."

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4. Less than 6 percent: While acknowledging that the expiration of this program is likely to push rates higher, the MBA expects rates to remain in an attractive range in 2010. Fixed mortgage rates will average around 5 percent in the final quarter of this year and rise to 5.6 percent by the end of 2010, the MBA predicts. Keith Gumbinger of HSH.com says that while the MBA's forecast isn't unreasonable, he expects rates to be modestly higher than the trade group predicts. "I would suggest that we are probably looking at a top end that probably ends up being closer to 6 percent than 5.6," Gumbinger says.

5. Sales and prices: The MBA predicts the unemployment rate will peak at 10.2 percent in the second quarter of next year. Nevertheless, the trade group expects to see an increase in home buying activity next year, with exiting-home sales up 11 percent from 2009 levels and new-home sales increasing 21 percent. In addition, "[national] average home price declines should abate by early 2010, but will vary by state and home value," the MBA said in its press release. "The demand will be highest for entry-level homes."