Where will rates go after a 65-year low?
In the stack of “2012 year-end” and “2013 look-ahead” stories written and discussed the past few weeks was an interesting note about mortgage interest rates. While borrowers have been lulled into complacency with reminders about “historically” low home loan rates, a recent review by Freddie Mac brought answers to just how long rates have remained low.
Thirty-year, fixed-rate mortgages averaged 3.66 percent last year, the lowest annual average in “at least” 65 years. Sixty-five. That means every home loan the Kelly family has taken out (and there have been several) was at an interest rate higher than what was available in 2012.
Why is the “at least” qualifier necessary? That’s because Freddie Mac was established in 1970. While 2012’s averages better any number since Freddie has been posting national charts, the rates charged by local banks in the post-World War II years of 1946-47 could have eclipsed last year’s 3.66 percent.
Besides low rates and increasing applications, what significant changes did lenders experience?
“Despite increasingly difficult economic conditions, people are really trying to do the right thing and be responsible with their credit and make their payments,” said Mark Palmer, vice president of loan production for Seattle Mortgage. “They are thinking longer term and making financial decisions based on living within their means. This is a shift I have really seen this year.”
Low rates, coupled with job growth, are starting to make a difference. The Commerce Department said that sales of new homes jumped 4.4 percent in November to a seasonally adjusted annual rate of 377,000. That is the fastest pace in more than two-and-a-half years and the latest sign the housing recovery is sustainable.
Frank Nothaft, chief economist at Freddie Mac, said the average 30-year rate fell 0.6 percent in 2012 from the 2011 average. That difference would save a homeowner about $98,000 in interest payments over the life of a $200,000 loan.
Our first loan? We found a little view home — two tiny bedrooms, one-and-a-half baths — in West Seattle in 1975. The price was $37,500. We scrimped and borrowed from the parents (taboo to borrow any down payment in those days) so that we had the 20 percent “down” required for a conventional loan. The 30-year mortgage was written at $30,000 at 9 percent. When rates went to 11 percent a few years later, friends and newspaper colleagues said they wished they had “Kelly’s rate” on their homes.
So, when did interest rates first become attached to long-term home financing? With the collapse of the banking system in 1929, the federal government was forced to produce solutions to what quickly became a national housing crisis. Most home loans then were short-term, nonamortizing deals financed by local investors or local banks. Most of these loans forced homebuyers to refinance their homes every few years at the local bank’s or insurance company’s prevailing interest rate.
The Roosevelt Administration began a number of initiatives directed at stabilizing the nation’s housing stock, encouraging home construction and promoting home ownership. The first of these programs was the Federal Home Loan Bank System that established a complex system of government support for home mortgages. A short time later, the Housing Act of 1934 created the Federal Housing Administration, which served as a review committee for banks and other loan institutions to make loans to low-income families.
The question becomes how long will rates remain low, giving the housing industry a greater chance to rebound? Most lenders say long-term rates will remain flat at least through the first half of 2013. After that, opinions are all over the board. Some lenders predict interest rates could easily rise 50 percent before the end of 2013.
How can consumers better prepare for the year ahead?
“Borrowers should develop a household budget and have a strategic financial plan,” Palmer said. “Try to determine and write down short-term and long-term financial and household goals. This will better assist a loan officer in making recommendations for appropriate loan products.”
Tom Kelly, former real estate editor for The Seattle Times, is a syndicated columnist and talk-show host.
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