Mortgage rates in 2011 are expected to hit levels considerably higher than what was predicted only one month ago, according to the latest economic forecast from government-backed lender Freddie Mac.

Following a sharp rise in interest rates from mid-November through December, Freddie Mac is now predicting that interest rates on 30-year fixed-rate mortgages will hit 5.5 percent in the fourth quarter of the year, up half a percentage point from the 5.0 percent forecast last month.

The lender also scaled back its projections for home sales and employment, even while predicting somewhat stronger economic growth overall.

Fixed-rate 30-year mortgages shot up from a historic low of 4.17 percent the week of Nov. 11 to 4.86 percent by the end of the year, as reported by Freddie Mac's weekly rate survey. They've subsequently backed off to 4.77 percent this week.

The jump forced a major revision to Freddie Mac's rate projections, which had predicted 30-year rates would average 4.5 percent in the first quarter of the year. The new forecast predicts rates will continue to climb, averaging 5.0 percent this quarter, then continue to rise toward 5.5 percent by year's end, and average 5.8 percent in 2012.

While still predicting improvements in home sales and unemployment, Freddie Mac has scaled back those predictions from last month, with home sales expected to peak at an annual rate of 5.70 million in the fourth quarter of 2011, then fall back to only 5.56 million in all of 2012. The previous forecast called for sales to rise to an annual rate of 5.80 million by year's end, then hold that level for 2012.

Freddie Mac still expects 2010 to be a recovery year for home sales, with sales predicted to be the best in at least three years, with the annual total about 10 percent above the 4.56 million recorded in 2010. Despite the recent increase in interest rates, the 5.2 percent average predicted for 30-year loans throughout 2011 would still make it the third-lowest year on record, trailing only 2010 and 2009.

A middling jobs report in December led Freddie Mac to back off its unemployment projections slightly, although the lender still expects a roughly half-percent decline in the unemployment rate this year, to 9.1 percent, from 9.6 percent currently.

The lender now foresees stronger-than-expected overall economic growth in the first quarter of the year, with the GDP expected to increase at an annual rate of 3.2 percent in the first quarter, up from a prediction of 2.8 percent last month, due in part to reports of stronger consumer spending and rising confidence.

Published on January 12, 2011