Mortgage rates have fallen for a month in the weekly Freddie Mac survey. The 30-year fixed rates fell 40 basis points to 5.20 percent. The 1-year adjustable rates fell 20 basis points to 4.82 percent. This is temporary and not a sustainable trend. Rates are very volatile. Expect one or more drops (increases) and then reverses on this scale yet this year.
The 30-year rates are expected to average 5.4 percent in the second half of 2009. Then rates will gradually float higher as the lowered limit on available credit becomes increasingly binding as the economy recovers.
The relatively low mortgage rates for the last eight months are the result of a drop in credit demand set off by the deep recession. There have been substantial drops in purchase and refinanced residential and commercial mortgages; auto loans; inventory loans; and construction and equipment loans. Hence, the limit on available credit has not been binding. Yes, there are critical spot credit access problems, but these are limited to cities with weak local banks — industries where lenders do not like the collateral that they are offered and the usual loan application rejections that accompany every recession. Elsewhere credit access is now near normal.
The projected improvement in the economy that begins this summer, even if relatively sluggish, will progressively raise credit demand. The available credit will become more binding by the winter requiring rationing through higher credit rates. The 30-year fixed rates will be in the 5.5-6.0 percent range by late next year in a sluggish recovery and higher if the recovery is buoyant.
The massive rise in federal borrowing, most of which is yet to happen, is diverting credit from mortgages and other loans. The new federal programs shore up the recovery but at the cost of higher credit rates for the cost of the economy.
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