KIRO Radio's Tom Kelly digs deep into the Puget Sound real estate market
Real Estate

Bankers' crystal ball: Rates to rise above 5% next year

Mortgage rates will likely rise above 5 percent in 2014 and average 5.3 percent by the end of 2015, according to the Mortgage Bankers Association's forecast.

Meanwhile, Freddie Mac today announced that fixed mortgage rates declined for the second consecutive week amid recent data showing softening in the housing market. Fixed mortgage rates averaged 4.10 percent (down from last week's 4.12 percent) are at their lowest levels since June. A year ago at this time, the 30-year rates averaged 3.39 percent.

The MBA expects that the Federal Reserve will decide to taper its $85-billion per month bond-purchasing program in early 2014 and end it altogether in September 2014. The Fed's bond buying program has been keeping mortgage rates low. The Fed has hinted in recent months that it will soon be winding down the program.

"As a result, mortgage refinancing will continue to drop, and borrowers seeking to tap the equity in their homes will be more likely to rely on home equity seconds rather than cash-out refinances," said Jay Brinkmann, the MBA's chief economist.

The MBA said in its forecast that it expects home purchase applications for mortgages to rise 9 percent next year, following expected continued home sales and price increases.

While refinancings make up the bulk of home applications today, that trend is expected to reverse next year. Purchase loans are expected to make up 60 percent of originations next year compared to about 38 percent this year.

"We are projecting home purchase originations will increase in 2014 due largely to gains in home sales and home prices," Brinkmann said. "We expect to see a decline in the share of sales paid for with cash, and higher average LTVs on purchase mortgages, due to the rise in home prices."

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