Will Interest Rates stay around 5.00% through the end of 2010?

Asked by Patrick Samson, Centreville, VA Tue Feb 9, 2010

We all know these wonderful low rates can not last forever, but will we at least see another year around 5.00%?
I purchased my 1st home in 1984 with a rate of 16.50%. I remember how happy I was when I refinanced into a 9.50% rate in 1987! We built an entire business in the late 1980's and early 1990's around FHA 8.00% and 8.50% assumptions. When I was working at Crestar Mortgage in the late1990's we had to lock the doors and take the phones off the hook because rates had hit sub 7.00%!!! Now we have a whole generation that thinks rates are outlandishly high when they reach 5.50%. What will happen when they inevidably drift back above 6.00%. Will the market place implode or will we continue to buy and sell homes?
All things to consider as we move ahead with our recovery. Let me know your thoughts on rates in 2010 and what the impact will be to the housing market. Good luck and here's to everyone's success!!!

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Kathy Weber’s answer
Kathy Weber, Agent, Murrieta, CA
Tue Feb 9, 2010
How scary!! I purchased my first how in "huh-hum", 1982!!! Interest rate 18%! Should have just put it on my credit card right!

Anyway, following a legitimate data king (he's been right on for the past 3 years!) - the predications I see and believe in will be that the interest rates rise at least 1%. In our area, predictions are that the housing market prices will drop at least 25% in the next 36 months.

Usually don't believe in all the data "mumbo-jumbo", but when someone's been right, they've been right! CAR's 2009 Housing Market Survey also backs the claim up.

We'll see!
Web Reference:  http://www.weberhomes.info
1 vote
Don Tepper, Agent, Burke, VA
Tue Feb 9, 2010
I expect interest rates to drift upward by a point or so by the end of 2010. But that's just a guess.

As for your deeper question--what will happen to the market when rates inevitably rise--that'll be a problem. Not primarily due to folks who've gotten conditioned to 5%-6% rates, though that is a factor. But just because every time rates rise, it makes properties makes properties more "expensive" by increasing the monthly mortgage payment. And the other tools that can be used to relieve that pressure (less money down, longer mortgages, ARMs) are either already in place or are unlikely to be used or expanded. FHA loans have become the new subprime loans for buyers with little money down. We already have ARMs. And I doubt that 50-year mortgages have much of a future.

To some extent, people will adjust. Back in 1984, gas prices averaged $1.21. See http://www.1980sflashback.com/1984/Economy.asp Folks have gotten pretty used to paying $2.65 or so per gallon. See http://gasbuddy.com/

Beyond that, when interest rates raise, some people get squeezed out of the market. That's not necessarily a bad thing. Everyone should have the right to buy a home but, realistically, not everyone is cut out to be a homeowner.

Further, when interest rates went up to 16% or so, people came up with a lot of creative ideas on how to buy property. And they turned to some techniques that weren't necessary when interest rates were lower (such as 8% back in 1974 when I bought my first home). There's equity sharing, lease-options, lease-purchases, contract for deed, owner financing, and so on.

Some agents tend to be short-sighted. I remember a few years ago most agent poo-pooed home staging. Homes didn't need to be staged; even cluttered, dirty homes sold. I remember how resistant agents were to techniques like lease-options, how strenuously they argued against them. But a few years ago, if you could fog up a mirror, you could get a mortgage. Today, more agents are open to that concept.

There are plenty of ways for sellers to sell their homes, and buyers to buy their homes. And that applies whether interest rates are at 5% or 16%. Agents should help their buyers and sellers adapt to the changing climate. (Yes, many of them do. But we're talking about more extreme situations than interest rates going up a point or so.)

So, while interest rates may well rise some in 2010, I don't think that has to be a major problem for real estate.

Good question.
1 vote
Mark Manz, Agent, Chicago, IL
Tue Feb 9, 2010

It is not a question of when rates will begin to rise, but by how much. Most of the Mortgage professionals that I talk to are already bracing for a slow rise to around 6-6.5% by July. But what happens after that? My guess is that the 1 to 1.5 % rise in interest rates will cause a flood of fence sitters to rush to act. As the demand moves up and the available money becomes scarce the rates will begin a more intense shift upwards. We had that happen from November to December. The other 1000 pound gorilla in the room is what happens to Europe more importantly southern European countries that teeter on the edge of bankruptcy. Will we see 16.50 % interest rates by next year I doubt it, but in the next 5 years we could see a large increase, especially if the national debt sky rockets and the treasury continues to print $$$ at an exponential rate.

Here is to success in 2010 and on.

Mark Manz
Web Reference:  http://www.markmanz.com
1 vote
Ute Ferdig, Agent, Newcastle, CA
Tue Feb 9, 2010
I predict that interest rates will go up. Our government is spending money that we really don't have, which will most likely drive us into a serious inflation and typically interest rates rise to fight inflation. That's what has happened historically and we'll see if history repeats itself. When interest rates go up, prices will come down as people can afford less.
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