Mortgage Rate Outlook

Rates are going to go up. It is almost inevitable. Why and how can I be so sure? Let me count the ways.

Reason 1: The Federal Reserve Bank is purchasing Fannie Mae, Freddie Mac, and Ginnie Mae mortgage backed securities. As you know, the value of these mortgage backed securities directly affects mortgage interest rates. This Fed program to purchase mortgage backed securities began in January and will end when they have spent $1.25 trillion. As of August 13th, the Fed had bought $741.6 billion of Fannie Mae, Freddie Mac, and Ginnie Mae mortgage backed securities. This leaves the Fed with about $500 billion more to spend. When this money runs out, mortgage interest rates will go up.



Reason 2: The United States Government is spending money at an unprecedented rate. In order to do this, they have to either print money or borrow from a country that is going to print it. What happens when governments print money? The money that already exists loses value. This, as you know, is called inflation. When inflation goes up, mortgage interest rates do as well.



Reason 3: The United States Government is borrowing money at an unprecedented rate. In order to borrow this money, they sell treasury securities. The sale of these treasury securities competes with the sale of mortgage backed securities. How? An investor who might have bought a mortgage backed security might now buy a treasury security. The sellers of the mortgage backed security will now have to raise the yield, ie. interest rate, in order to entice buyers to buy their security instead of the treasury security. Make sense? Increased competition in the securities market will make interest rates go up.



Where rates will stop is obviously unknown. Many experts believe that we will see mortgage interest rates go back to where they were before the government started their mortgage backed security purchase program. That point is the mid 6s. However, if the economy gets really hot again, inflation is really going to be a problem. If this happens, it is possible that we will see double-digit interest rates again.