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What’s Next For Mortgages?

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Posted On: 01/28/2015

Question: At year-end mortgage rates were around 4 percent. Any predictions regarding where rates are headed in the coming year?

Answer: It would be great if we knew with certainty where mortgage rates were headed during the coming year. Predictions of higher rates might encourage us to buy, finance or refinance now, before financing becomes more costly while forecasts of lower rates might suggest that we should wait until financing costs decline.

Before looking at the 2015 mortgage rate predictions it’s worth examining the 2014 forecasts so we have a basis for comparison.

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The National Association of Realtors: as high as 5.4 percent.

The Mortgage Bankers Association: above 5 percent.

The National Association of Home Builders: 5 percent.

Looking back, what really happened in 2014 is that mortgage rates largely clustered in a range from roughly 4 percent to 4.25 percent, good news for buyers, borrowers and sellers.

While home values rose in most markets, existing home sales lagged for much of 2014 but began to get stronger toward year-end. New home sales puffed along with little change: As of October new home sales to date amounted to 371,000 units in 2014 versus 367,000 in 2013.

Meanwhile, on the mortgage front, refinancing activity fell through the floor. As the Mortgage Bankers Association explained, most eligible borrowers had “already refinanced into lower rates and it has been estimated that about 80 percent of loans outstanding have a mortgage rate of 4.5 percent and lower. Within the remaining 20 percent, it is likely that many are still underwater, owing more than their homes are worth, or do not have the income or credit to refinance.”

Not only was there little marketplace demand to push up mortgage rates, on the other side of the equation there was lots of supply in 2014, some $2 trillion in “excess” cash according to Maury Harris, managing director and chief U.S. economist at UBS.

So what about 2015?

Projections for 2015 are largely clustered around 5 percent with the NAHB suggesting that rates could reach 5.49 percent.

The view here – for whatever it might be worth – is a little different. I see a pickup in the marketplace because of better economic conditions. Specifically, world oil prices are falling in large measure because of the growing energy available through wind, solar and fracking.

In the U.S., according to the American Petroleum Institute, lower gas prices “have saved U.S. consumers an estimated $63 to $248 billion in 2013 and estimated cumulative savings of between $165 and $624 billion from 2008 to 2013.”

There is every reason to believe that lower gas prices will continue in 2015, the equivalent of a huge pay raise for Americans that can be spent on things other than oil. With additional disposable income, much can be done to reduce outstanding debts and increase the purchase goods and services. For instance, while home prices are generally rising mortgage debt is actually declining, going from $10.4 trillion in 2009 to $9.4 trillion in 2014, according to the Federal Reserve.

The oil glut is an objective, visible marker of great importance, one that hopefully heralds better times for us all in 2015. As for mortgage rates during the coming year, there’s very little reason for them to change given the worldwide movement of capital to the U.S., a weak refinance market, tough times in Europe and Asia, the growing presence of high-mileage cars, the continued importance of all-cash real estate transactions, the end to monthly bond purchases by the Federal Reserve, a fragile jobs market and home values, which remain below their 2006 peak.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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