Mortgage Rates Point to Another Record Housing Year
Long-term mortgage interest rates, which haven’t budged much this year despite the Federal Reserve’s ongoing drive to push up rates to a level that neither stimulates nor slows the nation’s economy, will average 5.8% this year, the same as in 2003 and 2004, according to Freddie Mac's July outlook for the housing finance industry.
The interest rate on a 30-year mortgage ticked up in Freddie Mac’s most recent weekly survey, averaging 5.62%, up from 5.53% during the previous week.
With the exception of a brief two-week period in March, 30-year mortgages have been below 6% all year, according to Frank Nothaft, Freddie Mac’s chief economist. “As a result the housing industry is likely headed for another record-breaking year.”
“The robust housing activity is directly related to the level of mortgage rates,” Freddie Mac’s July 7 report said. “The dip in 30-year fixed-rate mortgage rates to a 14-month low in June rekindled housing demand and sparked the record pace of sales activity.”
Freddie Mac is now forecasting 1.99 million housing starts this year, and a decline to 1.83 million units in 2006. It will be another record year for single-family production.
New and existing home sales are expected to hit a record, climbing to 7.21 million transactions this year, before slowing to 6.73 million in 2006 as a consequence of slightly higher mortgage rates.
Freddie Mac also forecast further moderation in the rate of home value appreciation, which is expected to slow from 7.9% in 2005 to 7% next year.
Business for adjustable-rate mortgages has remained brisk, Freddie Mac said, “as lenders have gradually increased the amount of the initial-rate discount offered on these products.”
The average fully indexed 1-year ARM during the last week of June was 6.24%, compared with an average starting rate of 4.24%, amounting to a 200-basis points discount.
“This is the largest initial-rate discount on a 1-year ARM in more than five years,” Freddie Mac reported. “Larger rate discounts, and a proliferation of ARM products that offer payment flexibility (such as the ‘interest-only’ and ‘option payment’ products) have kept the ARM share of originations close to one-third of primary market production.”
Freddie Mac indicated that the ARM share is unlikely to hold up to that level next year as the Fed continues to increase short-term interest rates.