Mortgage Trends This Week: April 12

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Last week, we wrote that the era of low interest rates had finally run its course.

Since then, the national media has been chock full of stories touting the recovering U.S. economy, which will trigger a hike in interest rates to pay off increasing federal government debt and to stave off inflation.

It’s a fair argument to make. Certainly mortgage rates (see chart below) are on the way up, with the 30-year-fixed mortgage rate climbing to 5.305% last week, according to BankingMyWay’s Weekly Mortgage Rate Tracker.

For some perspective, the average 30-year rate back in December 2009, was about 4.7%. Now, professional rate watchers expect that number to hit 6% by the end of 2010. But it’s not just mortgage rates. Both credit card rates (up to 14.26%, the highest rate since 2001) and auto rates (up to 4.72% from 3.26% in December 2009) are up significantly, as well.

But there is a caveat. If the economic recovery isn’t sustainable, or (more likely) moves at a glacial pace, the Federal Reserve likely won’t play along by hiking its prime interest rate. In a weekend survey of leading U.S. economists, most don’t expect the Federal Reserve to hike interest rates until the end of 2010.

The AP’s quarterly economic survey also reveals the following recovery-threatening estimates:

  • The unemployment rate will stay stubbornly high the next two years. It will inch down to 9.3% by the end of 2010 and to 8.4% by the end of 2011. The rate has been 9.7% since January. When the recession started in December 2007, unemployment was 5%.
  • Home prices will remain almost flat for the next two years, even after plunging an average 30% nationally since the peak in 2006. The economists forecast no rise this year and a 2.3% gain next year.
  • The economy will grow 3% this year, which is less than usual during the early phase of a recovery and the reason unemployment will stay high. The AP says it takes growth of 5% for a year to lower the jobless rate by 1%.

Such numbers beg the question: Is the economic recovery for real? Maybe not, especially as historically aggressive efforts from the U.S. government to regain economic momentum winds down. That’s the argument Yale economics professor Robert Shiller makes in The New York Times recently.

“The recession is generally viewed as being over, and those extraordinary measures are being lifted,” he writes. “On March 31, the Federal Reserve ended its program of buying more than $1 trillion of mortgage-backed securities, and the homebuyer tax credit expires on April 30.”

“Recent polls show that economic forecasters are largely bullish about the housing market for the next year or two,” he adds. “But one wonders about the basis for such a positive forecast. Momentum may be on the forecasts’ side. But until there is evidence that the fundamental thinking about housing has shifted in an optimistic direction, we cannot trust that momentum to continue.”

So let’s not get too carried away that a sustained economic recovery will lead to a new era of higher interest rates. It will for the short term, but after that? Nobody really knows for sure. Now, back to the current numbers, as measured by BankingMyWay Weekly Mortgage Rate Tracker:

Description          This Week      Last Week

One-Year ARM          3.353%         4.143%

Three-Year ARM       4.378%         4.22%

Five-Year ARM          4.261%         4.193%

15-Year Mortgage    4.69%           4.577%

30-Year Mortgage    5.305%         5.285%

To find the best mortgage rate deal before it’s too late, check out BankingMyWay’s Mortgage Rate Search. No doubt, it’s your best bet for finding the best mortgage rate deal possible.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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