After a year and a half of Fed rate hikes, mortgage rates hold

Long Island Business News, Jan 27, 2006 by Claude Solnik

Everyone has said it. Mortgage rates would shoot right through the roof as the Federal Reserve kept on hiking short-term interest rates.The common wisdom was that the two were linked as closely as two tango dancers. They always moved in concert. As banks paid more, they would pass it on to consumers.

Those assumptions were wrong.After a year and a half of Fed rate hikes, mortgage rates have been holding pretty steady. Recently they've even slipped despite the 13 Fed lending rate hikes in a row.This past month the 30-year, fixed-rate mortgage dropped to 6.22 percent with 0.29 percent points, the lowest since Oct. 19, when the rate was 6.17 percent, according to Bankrate.com. That means it's up only slightly from 5.76 percent a year ago, but down from 6.34 percent a month ago.That's the bottom line. It's holding steady, if anything, says Seth Kramer, president of Cambridge Home Capital, a licensed mortgage bank in Great Neck.Looking back, all those gloomy predictions may have boosted demand. And the greater volume may have held down the need to hike those rates. When it's in people's minds that there's a potential hike or that rates are going to go up, I think it creates urgency, says Kramer. Business at his firm is up. People on the fence, I think, now realize that if it didn't go up to the point they thought it would, it potentially will get there, so they might as well get off the fence now.The chorus is now singing a different tune. Prognosticators seem to think that mortgage rates may rise, but not zoom.The forecast calls for an increase in rates this year - but not much, according to Holden Lewis, a writer for Bankrate.com. Starting in June 2004, the Fed began a string of hikes that raised the key Federal Funds Rate, used as the basis for banks to lend to each other, from 1 percent to 4.25 percent. But during that time, the 30-year fixed rate mortgage actually slipped from 6.3 percent to an average of 6.2 percent. Despite these Federal Reserve rate hikes, mortgage borrowing rates remained very attractive, says Paul Merski, chief economist at the Independent Community Bankers of America in Washington. Like many others in the field he expects only slight hikes this year in mortgage and Fed rates. Merski sees two more quarter-point Fed rate hikes on Jan. 31 and March 28, making the Fed Funds rate 4.75 percent in 2006.Meanwhile, he predicts that the current 6.25 percent rate for a 30-year-fixed rate mortgage will rise to about 6.7 percent in 2006. The missing link?Nobody's saying that there's really no connection between the Fed rate and mortgage rates.It's a solid link between the cost of funds, what banks have to pay, and what they have to charge consumers, says Community Bankers' Merski.But just a year and a half ago the Fed rate was at an historic low level of 1 percent, which may have left breathing room for the Federal Reserve to raise rates without a big bump. Now, the Fed is hinting that it doesn't intend to hike rates suddenly or frequently, because inflation seems to be under control. That can keep mortgage rates stable, since there's no push to hike mortgage rates in anticipation of banks' rising costs.In addition the rates may be helped by everything from volume to competition to cuts in costs due to automation.The fact that housing prices are leveling off could also be good for the overall market since that's likely to keep demand robust and prices in reach of buyers.A better balance between home prices and household income growth in 2006 and beyond will provide a fresh opportunity for first-time homebuyers, says Merski. Double-digit price appreciation in many markets severely strained affordability.Alan Greenspan's decision to leave the Federal Reserve on Jan. 31 could have led to uncertainty and boosts in mortgage rates, he adds, but there's a lot of faith in the incoming chairman, Ben Bernanke. This confidence in Bernanke, combined with the low core inflation rates, currently is helping to keep mortgage rates in check, Merski said.A look aheadHow is 2006 likely to shape up? Nobody expects a repeat of the banner year of 2005. Fewer mortgages are likely to be taken out and refinanced in 2006. But it's likely that the year will be another good one for banks and consumers.Even though you'll see the demand for mortgages and homes drop as much as 8 percent, that drop is still going to be a high level, robust solid year for the housing market overall, Merski's predicts. It just won't be the top as it was in 2005.Meanwhile, mortgage bankers, bolstered by a belief that the Fed won't hike rates radically over the next year, have a rosy view of the year.I think the future is bright, Kramer says, explaining that even if the overall direction for rates is up, I don't think it will go up as drastically as people believe. I think the real estate market will settle or level off a little bit, rather than this prediction of a bubble bursting.