City homes

Don DeBat

Historically low interest rates may spur housing market in 2007Â

The roller-coaster mortgage market likely will stay in the 6 to 6.5 percent range in 2007, and that should make home and condominium buying less stressful, experts say.

In its January 2007 economic outlook, Freddie Mac predicted that low inflation is likely to keep long-term Treasury yields low, and in turn, hold benchmark 30-year fixed mortgage rates below 6.5 percent. As of Jan. 18, Freddie Mac reported that lenders were quoting an average of 6.23 percent on 30-year fixed loans.

Mortgage rates declined in the second half of 2006, then inched up a bit at the end of the year and in early 2007. Back in mid-July of 2006, the average rate quoted on a 30-year fixed-rate mortgage was 6.74 percent. By early November, lenders were charging an average of 6.33 percent for a 30-year loan, and by mid-December the rate had skidded to 6.12 percent. By comparison, at the end of 2005, lenders were charging an average of 6.3 percent on a 30-year fixed loan.

Today’s rates are better than at the end of 2005, when lenders were charging an average of 6.3 percent on a 30-year fixed loan. Some experts say the economy could be on course for a soft landing, and if that happens, there is a good chance mortgage rates will remain stable in 2007, assuming the Federal Reserve Board sets the interest rate thermostat just right.

The Fed held the federal-funds rate unchanged at 5.25 percent on Dec. 12 for the fourth consecutive policy-making meeting dating back to last June. At press time, most economists believed the Fed would continue to hold interest rates steady at the group’s Jan. 30-31 rate-policy session.

Beginning in mid-2004, the Fed methodically raised short-term interest rates 17 times during a period of two years, then paused its rate-tightening campaign in June of 2006.
The most recent 6.23 percent home-loan rate is just about 1 percentage point above the 40-year historical rock bottom of the market – 5.21 percent in June of 2003, experts say.

However, the rocky world of mortgageland is unpredictable. Few of today’s novice borrowers remember that only seven and a half years ago, in August of 1999, lenders were quoting 8.15 percent on a 30-year fixed mortgage.

To appreciate today’s historically low rates, housing experts say home buyers need only look at what banks and mortgage lenders where charging in the early 1980s.

According to Freddie Mac, benchmark 30-year mortgage rates peaked at a whopping 18.45 percent in October of 1981 during the last great housing recession. Rates fell below 10 percent in April of 1986 then bounced in the 9 percent to 10 percent range during the balance of the 1980s.

Archives of the now-defunct Federal Housing Finance Board show long-term mortgage rates were a very affordable 5.81 percent to 5.94 percent between 1963 and 1965.

In 1966 and 1967, borrowers paid an average of 6.3 percent to 6.4 percent. Rates last dipped below 6.5 percent in January of 1968, when the national average hit 6.41 percent. Between 1971 and 1977, the now-defunct Illinois usury law held rates in the 7.6 percent to 9 percent range.

Through a series of dips and up-ticks, rates have averaged 5.21 percent to 8.4 percent during the past 12 years.

What is the outlook for 2007?

“We expect long-term mortgage rates to rise over the new year, but they will very likely not get up to even 7 percent, which will help to moderate the current weakness in the housing market,” said Frank Nothaft, Freddie Mac vice president and chief economist. “Mixed economic reports have kept mortgage rates from making any drastic changes during the latter half of 2006,” Nothaft said. “On the upside, there was stronger job growth and greater than expected retail sales in November. Offsetting that news was weaker wage growth in that same timeframe and lower indications of consumer sentiment in December.”

With the economy slowing and the once-hot housing market cooling, the Fed’s Open Market Committee may lean toward softening rates when it meets in March 2007. Some analysts are forecasting that rates will begin to move downward in the second half of 2007. If the opposite happens and the Fed moves rates higher, the economy may slide lower than expected. Then the Fed likely would begin a series of rate cuts to stimulate the economy back to life.

Some analysts believe the housing market has hit bottom and will begin to recover in 2007. David Lereah, chief economist of the National Association of Realtors, said housing “appears to be stabilizing,” and he forecasts steadily improving home sales in 2007.

If interest rates dip toward the historical low 5 percent range, it could spark a mini buying frenzy in some markets because of the deferred demand built up in 2006.Â

Because the key variables could go either way, experts note that the economy, inflation, interest rates and the Fed are walking a tightrope into 2007.Â

Real estate columnist and media consultant Don DeBat has written about Chicago-area housing and mortgage markets since 1968. He is chief executive officer of DeBat Media, Inc.

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