SCRIPPS HOWARD NEWS SERVICE
January 9, 2004 It is the nature of a roller coaster to start at a certain elevation, go up and then plunge, ending up at the same place
where it started. In 2003, mortgage rates took a roller coaster ride -- one of those kiddie coasters for toddlers and the timid.
This year won't resemble a roller coaster. Instead, experts believe, it will look more like a leisurely walk up a modest hill.
The average rate on a 30-year, fixed-rate mortgage began 2003 at slightly under 6 percent, and that's where the average mortgage rate
was at the end of 2003.
Experts think 2004 will play out differently. They see a long, gradual increase in mortgage rates. The long-lived refinancing boom,
which isn't dead yet but is feeling quite ill, will finally kick the bucket in 2004. As a result, tens of thousands of mortgage brokers
and loan officers will join the unemployment line.
Those who remain employed will hawk hybrid adjustable-rate mortgages for home buyers who got accustomed to mortgage rates under 6.5
percent. Mortgage lenders will aggressively promote home equity debt.
Experts generally believe that 30-year mortgage rates will end 2004 at between 6.5 percent and 7 percent -- a gradual, fairly small rise.
Doug Duncan, one of the most cautious prognosticators as well as one of the most accurate, predicts that the average 30-year rate will be
about 6.5 percent at the end of 2004. He believes they will rise to between 7.2 percent and 7.4 percent at the end of 2005.
Duncan, chief economist for the Mortgage Bankers Association of America, bases his prediction on today's low inflation (by one measure,
just 1.6 percent in the 12 months ending in November) and Federal Reserve officials' statements that the central bank is in no hurry to
increase short-term rates. The federal funds rate has stood at 1 percent since June 25.
"The Fed has said that they're staying on the sidelines for a long time, so we're going to believe that," Duncan said. "Our view is that
it's likely to be at least until mid-year, or perhaps August or later, before the Fed boosts interest rates."
Dave Herpers, director of consumer affairs for mortgage lender Amerisave, predicts that rates "will bump around the 5.5 to 6.5 percent
range, with an occasional spike to 7 percent." He believes that as long as fixed-rate mortgages stay below 7 percent people will
continue to buy houses at an extraordinary pace.
He also believes that mortgage lenders, ever hungry for sales leads, will form partnerships with builders, real estate agents,
insurance agents -- even lawyers and financial planners. So your next mortgage might be sold via your financial adviser.
Tom Meyer, president of Homebuilders Financial Network, which operates in-house mortgage lenders for large builders, believes that
rates will be close to 7 percent a year from now. That's a good rate, by historical standards, but some home buyers might balk at 7
percent because they have been spoiled by a long period of low rates. (The last time the average 30-year fixed rate exceeded 7 percent
was the week of April 11, 2002, when it was 7.01 percent, and people were counting hanging chads in Florida the last time the average
30-year rate exceeded 7.5 percent -- November 2000.)
If long-term rates light out for the 7 percent territory, lenders will be poised to offer hybrid adjustable rate mortgages. A typical
hybrid ARM would sport a low interest rate for five years, then adjust annually after that. It's a good way to keep mortgage payments
low, especially for buyers who expect to move within five or six years.
"There are ways to continue to make available to home buyers very low interest-rate opportunities," Meyer said. "And the mortgage
industry is pretty creative."
E-mail Holden Lewis at hlewis@bankrate.com.
Chicago Sun-Times
South Zone 7
English
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