Prepare for rising mortgage interest rates

Those of us inside the real estate and mortgage industries have been conscious of this coming change for several months, but this article appeared today on Wall Street Journal MarketWatch:

Investors see mortgage rates rising as Fed wraps up buys

“Some bond investors are expecting mortgage rates to rise as the Federal Reserve finishes its planned purchases of nearly $1.5 trillion in mortgage-related bonds, yet another risk to the fragile U.S. recovery.”  More:  http://www.marketwatch.com/story/mortgage-rates-to-rise-as-investors-eye-feds-exit-2009-11-03

The Fed has been a HUGE buyer of mortgage-backed securities, artifically supporting demand and holding bond yields down.  They have now finished most of those purchases and plan to unwind that program by the end of March 2010.  If investors pick up the slack, they will likely demand a higher return.  If demand for the securities falls, there will likely be less mortgage money available, and that will exert upward pressure on rates as well.  Is a 7% par rate possible next year?  Higher?  Will it matter?

For those of us who have been around for a while, 7% is historically very low, but I have talked to many buyers over the past couple of years who were genuinely concerned about rates rising to 6%.  A little discussion always got us past that, but this is an emotional issue for many younger home buyers.  If the predicted rate increases happen, they will begin to reach the market at about the time the most recently proposed extension of the homebuyer tax credit ends (assuming it is approved).  There is also every reason to expect rising home prices next summer in most markets, including Central Texas.

A hint of hope:  This article also notes that last week the Fed ended its purchases of 10-year treasuries, and so far that yield has not changed appreciably.

Assuming the tax credit extension is approved, buyers will have another six month window to take advantage of low prices, extremely low rates, and tax incentives.  By next summer, it could be very different.  I am confident that the market will go on.  Families still grow, kids grow up and move away, employees get transferred or change jobs, etc. so real estate will continue to sell, but it may be particularly attractive in the coming months.