At a time when the housing market is struggling to recover, the slightest mortgage rate adjustment is scrutinized since even a minor rise stands to lessen the buying power of borrowers. In the most basic of terms, lower interest rates afford buyers more house for their money. Additionally, higher interest rates typically cause home prices to fall.
In the last report of 2009 by Mortgage-industry giant Freddie Mac, the rate on a 30-year fixed loan rose to 5.14 percent, up from recent lows below 5 percent. The report also revealed a higher cost of adjustable-rate home loans. This rise is consistent with predictions that the 30-year fixed rate will reach 6 percent in 2010. While still low by historical standards, this is a change that affects the delicate state of the housing market which is inextricably linked to the overall economic recovery.
Tax incentives for first-time buyers and low interest rates are the two factors that have most influenced the recent welcomed increase in housing demand. However, the tax breaks are scheduled to end by mid-2010 and the Fed plans to stop buying mortgage bonds in the first quarter. This will stop the flow of money into the market for housing finance, and may constrict available credit.
Along with interest rates, lending standards are a key factor of housing market recovery. The two go hand in hand since borrowers can only take advantage of low interest rates if they get approved for a loan. With high foreclosure rates expected in the new year, banks and regulators are guarding against the risk of bad loans.