Following a sharp rise in interest rates from mid-November through December, Freddie Mac is now predicting that interest rates on 30-year fixed-rate mortgages will hit 5.5 percent in the fourth quarter of the year, up half a percentage point from the 5.0 percent forecast last month.

The little green mark is approximately where the FED would like to see mortgage interest rates at the end of the year… which is lower than the Freddie Mac Forecast.

Why is the Fed Target LOWER than the Freddie Mac Forecast?  Because the FED (and most Economist) realize that the Housing Market is an important part of the overall health of the Economy. 2011 is expected to be the year that we see the MOST bank foreclosed properties hitting the local real estate markets, obviously creating even more supply and likely driving prices (Values) down in many areas.

QE II and Federal Reserve Mandates

Again… the Fed knows that Mortgage Interest rates in the upper 3′s lower 4′s brought much more interested buyers into the market. So why are mortgage interest rates headed to 5.5%?

The Fed has two mandates: keeping prices stable and creating an economic climate for low unemployment.   Prior to taking his current job, in one of his published papers, Ben Bernanke made the case for the Fed to target a specific inflation number, and the number that came to be accepted as his target was 2%.

In his famous helicopter speech in late 2002, he assured us that inflation could not happen “here,” even if the short-term rate was zero, because the Fed would move out the yield curve by buying large amounts of medium-term bonds. This would have the effect of lowering yields all along the upper edge of the curve. This became known as quantitative easing (as a reminder, Mortgages are sold as Mortgage Backed Security BONDS – and the government is suppose to be the LARGEST PURCHASER of mortgages).

In Jackson Hole last summer, Fed Chairman Bernanke, pleased with the effect of the first round of Fed Buying (QE I) announced the second round of liquidity-injecting quantitative easing (QE2). In that speech, in later speeches in the fall, and in op-ed pieces he said that such a program would lower rates.

Then a funny thing happened on the way to QE2:  long-term rates began to rise all over the developed world. As Yogi Berra noted, “In theory, there is no difference between theory and practice. In practice, there is.” It’s got to be driving Fed types nuts to see the theory of QE, so lovingly advanced and believed in by so many economists, be relegated to the trash heap, along with so many other economic theories (like that of efficient markets). The market has a way of doing that.

So, in an interview on CNBC with Steve Liesman last week Bernanke was asked about one minute into the clip (link ) about the little snafu that, following QE2, both interest rates and commodity prices have risen. How can that be a success? Ben’s answer (paraphrased):

“We have seen the stock market go up and the small-cap stock indexes go up even more.”

Really? Is this the third mandate of the Fed?  Foster a rising stock market?

I wonder what the Fed’s target for the S&P is for the end of the year? That would be an interesting bit of information. Are we going to target other asset classes – because clearly targeting long term mortgage interest rates hasn’t worked!

Understand, I am not against a rising stock market… but the Stock Market should not be the Fed’s FOCUS.!  It’s certainly not a reason to add $600 billion to the balance sheet of the Fed when we clearly do not understand the consequences.

“If it looks like they’re making up the rules as they go along, it’s because they are.”

Bottomline For Mortgage Interest Rates in NC for 2011

Because the FED policy has been largely ineffective, and because Freddie Mac and Fannie Mae will be adding risk level fees to mortgage rates starting in April… we believe that there’s more room for mortgage rates to rise than fall.  We are telling clients to lock into a mortgage rate now.

When rates do start to rise, we expect that they’ll rise quickly. There is lots of concern about ARM (adjustable-rate mortgage) resets.  Fortunately, most of the ARMs adjusting in 2011 are tied to LIBOR.  This will likely result in LOWER payments for homeowners with this type of ARM – at least until the next adjustment.

The other concern is that mortgage guidelines in North Carolina will continue to get tighter.  It will be harder to be approved in 2011.  With new Federal Consumer Protection laws, there’s extra scrutiny by banks. The minimum requirements, including credit score and Credit HISTORY are higher,  the documentation and verifications for self-employed borrowers is tougher, and that decreases the buyer pool.

If you are considering a purchase in Raleigh or Cary, NC – or you want information about mortgage interest rates in NC, please call Steve and Eleanor Thorne 919-649-5058.