Why 5% Mortgage Rates Are Still a Ways Off

5% MortgagesAt the Eastside Windermere Kick-off, we heard from Matthew Gardner (Gardner Economics) and his predictions on our housing market statistics for this year. One of his discussion topics was the low mortgage rates we’re seeing. He predicted that we wouldn’t be seeing 5% rates this year, and if we did they’d be near the end of 2015.

In a recent posting on Credit.com’s blog, Scott Sheldon also share his reasoning for why we won’t be seeing 5% mortgage rates for a while.

Credit is still tight

Recently, Fannie Mae announced home lending is about to get easier for some borrowers by lowering the minimum down payment to buy a home from 5% to 3%. While this is a step in the right direction, it doesn’t make up for the macro-lending constraints still in place today.

While credit might be loosening in small niche areas, like helping first-time home buyers by allowing lower down payment options, the overall market is still incredibly tight. The main separator is that the human element of making a pragmatic lending decision is no longer acceptable by Fannie Mae or Freddie Mac. Instead, lenders now exercise caution when going down the checklist in order to approve a loan application.

Supporting higher rates

If interest rates were to rise to, say, 5% from the 4% levels they are at now, that would wipe out many potential buyers from the market, causing housing prices to fall because fewer people can afford homes with 5% loans than they can with 4% loans.

As long the ability to obtain credit continues to be tough, the prospect of mortgage rates rising to 5% is not likely to occur.

The mortgage industry would have to reduce credit standards (allowing more loans to be made) to offset the risk of less mortgage volume. Lowering standards, not to where they were at from 2004-2007, but making them much less strict than the guidelines currently in place would be the option rather than purchasing mortgage securities again. These higher credit standards are keeping our current record-low mortgage rates in place.

When to worry about higher mortgage rates

When mortgages are easier to obtain, and the credit standards have lowered, then you can start being concerned about the extra interest and how much more that home will cost you. Until then, mortgage rates are more likely to stay in the low-4% range throughout 2015, with perhaps a few intermittent spikes as high as 4.75%.

Read the original article on Credit.com.

Image via Credit.com

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