Mortgage Rates Predicted to Hit 6 Percent in 2010

By:: Kara Johnson | January 13, 2010

Mortgage interest rates will jump to around 6 percent in the coming months, but then stabilize for the rest of the year, according to a new economic forecast from the Mortgage Bankers Association (MBA).

The MBA predicts that average interest rates on 30-year fixed rate loans will hit 5.9 percent in the second quarter of 2010, then gradually rise to 6.0 and 6.1 percent in the third and fourth quarters, respectively. The average 30-year rate is currently 5.13 percent according to the latest MBA weekly rate survey, released today.

Many observers have been predicting that interest rates will rise significantly after the Federal Reserve concludes its purchases of $1.25 trillion mortgage-backed securities in March. That program, announced in March 2009, pulled mortgage interest rates to record lows and has been widely credited for helping to spur housing sales and slow the decline of housing prices over the past year.

Long-term, the MBA is expecting 30-year rates to average 6.2 percent throughout 2011, around the same as they were in 2007-08, before the collapse of the subprime mortgage markets.

Despite the predicted rise in interest rates, the MBA is also predicting steady gains in new home construction throughout 2010 and beyond, with new home starts forecast to rise in every quarter. From an annual rate of 480,000 single-family construction starts in the fourth quarter of 2009, the MBA is predicting that single-family home construction will rise to a rate of 660,000 starts in the fourth quarter of 2009, and hit 840,000 in 2011.

Total mortgage activity is expected to decline to $1.28 trillion in 2010, down from $2.11 trillion in 2009, due to a major drop in refinance activity due to rising interest rates. Refinancing is expected to make up only 39 percent of all mortgages in 2010, compared to 65 percent in 2009. Total refinancing is expected to fall to $500 billion for the year, down from $1.37 trillion in 2009.

Home purchase financing is expected to increase modestly in 2010, up to $776 billion from $742 billion in 2009. Home purchase financing is expect to continue climbing over the next three years, although the $921 billion forecast for 2012 would still significantly trail the $1.14 trillion in home purchase financing recorded in 2007.

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