Rate projections for 2011

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The new year has started, Atlanta has thawed out from Snow-pocalypse 2011, and work is finally getting back to a normal rhythm. That means it is time to get going with blog posts in the New Year!

It is January, and typically the purchase market is down this time of year. The number of people looking to buy a home and starting the process is usually down because of the holidays. Now that doesn’t mean this is always the case – it is just a trend.

Recently someone asked me about rates for the beginning of the year, and he figured rates would drop because banks would need to lower rates to encourage more people to go out and buy homes.

That is an interesting theory, but it is one that is not true. Thank goodness interest rates are not based on a whim or need of a big bank, government or another entity. Interest rates are based on the value of mortgage backed security bonds (or MBS bonds). As the value of MBS bonds increase, interest rates decrease – and vice versa.

It is no coincidence that in a year that saw some of the highest levels of MBS bond values on record, we also saw historically low interest rates. They do go hand in hand.

That means the question isn’t “what will rates do in 2011?” Instead, a better question is “what impacts the value of MBS bonds, and how might things play out in 2011?”

There are several factors that influence the value of MBS bonds. Just like stocks can increase/decrease in value on a daily basis with earnings reports, economic outlook, etc., the same can be said for bonds.

Looking at it from a macro-level, the state of the economy tremendously influences MBS bond prices.

  • As our economy enters a down cycle (like we are currently experiencing), jobs are lost, stocks become riskier investments, investors are looking for “safer” places to invest their money, and the investment dollars turn more toward bonds (including MBS bonds). This increases MBS bond values and decreases interest rates.
  • As an economy enters an up cycle, jobs are being created, people/businesses are spending money, inflation becomes a concern, investors begin taking more risks with investment dollars and turn more to stocks. This pulls money out of bonds, and hurts their value. This causes interest rates to rise.

There are other factors that can come into play such as the technical aspects of trading, economic troubles in other parts of the world (think Euro Zone), wars and rumors of wars, dramatic price changes in commodities such as oil, the federal funding rate… I could go on and on and on, but the two bullet points above provide a good starting point for discussion.

Where will rates go from here in 2011? In my opinion:

  • until the economy takes a turn for the better, we should still expect to see traditionally lower interest rates. When the downturn began, rates were right around 6.000%
  • that said, the range can vary with no guarantee of rates staying below 6%. In 2010, interest rates for a 30 year fixed mortgage ranged from 3.625% to 5.500%. That is quite a range, and they are currently in the mid to upper 4’s.
  • don’t forget that there are always unexpected events that could help (Euro troubles) or hurt (unexpected growth seen in job reports) rates

For those of you out there considering whether now is the time to buy, I would definitely say, yes, it is the right time to buy a home. There are great homes available, interest rates are still near historic lows, and buyers can qualify for mortgages with as little as a 3% down payment. Instead of continuing to watch and hope for lower and lower rates or home prices, it might just be time to get moving!

If this is the year you are ready to move up to a larger home for a growing family OR 2011 is the year you finally purchase your first home, OR any other reason that brings you into the market to buy a home, I would be happy to help you get started with the prequalification process. It only takes a few minutes, and planning ahead is they key to a smooth home buying experience!

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