Back in the early 18th century, Sir Isaac Newton, the great physicist, mathematician and astronomer, lost much of his fortune when the South Sea Bubble burst. That was one of the earliest cases of an overinflated market imploding. The old man -- he was in his seventies when disaster struck -- seems to have been remarkably philosophical about his loss, observing: "I can calculate the motion of heavenly bodies, but not the madness of people."
Since that time, we have become even better astronomers, but our ability to predict markets ("the madness of people") has not noticeably improved -- as we all witnessed just a few short years ago. It's worth bearing that in mind when reading anything -- including this article -- about what might happen to current home mortgage rates.
Low Mortgage Rates May Not Last
Few expect mortgage rates to rise quickly or steeply any time soon. But there are two reasons why rate might increase more rapidly and sharply than most experts think.
First, markets are built almost entirely on confidence. And, as both the South Sea Bubble and the crash of 2007/8 showed, that can turn on a dime. Right now, huge numbers of people are regaining confidence in the housing market,which is driving up realestate prices and increasing demand for mortgages. Recent research backsthis up:
- In its latest edition of The Market Pulse (PDF), published Feb. 12, CoreLogic noted that home prices nationwide increased by 8.3 percent in December 2012 over December 2011. That's the highest rise since May 2006.
- The same report found that 6.6 percent more homes were sold in 2012 than in 2011.
- RealtyTrac reported that 2012 foreclosure filings were down 3 percent from 2011 -- and a whopping 36 percent from 2010.
- On Feb. 11, the National Association of Realtors (NAR) released its latest house price data -- median home prices showed a bigger year-over-year increase in the last quarter of 2012 than at any time in the last seven years.
- In that same document, the NAR's Housing Affordability Index (based on median home prices, median family incomes and average mortgage rates) indicated that owning a home in America was more affordable in 2012 than at any time since the organization started counting.
That Second Reason Low Mortgage Rates Might Soon Disappear
The second reason is a bit more complicated and speculative than the first -- although it's based on that most simple of economic concepts: the law of supply and demand.
As Markos Kaminis recently asserted on the investment website Seeking Alpha, the last time there was high demand for mortgages (you remember: before the credit crunch), there was a plethora of lenders eager to satisfy consumers' needs. But a whole lot of those went bust, and others like Countrywide were rescued by big banks.
Those that remain standing (Kaminis mentions Bank of America, which took on Countrywide, and Citigroup and Morgan Stanley) are often still encumbered by underperforming mortgage-backed securities that have left them with little appetite for new home-loan risks.
Other established lenders and some new players have taken up the slack. But what happens if demand for mortgages increases significantly, as seems likely to be the case? There is a real possibility of short supply colliding with abundant demand, creating an irresistible upward pressure on prices -- which, in this case, means mortgage rates.
The Best Mortgage Rates
As Sir Isaac Newton discovered to his cost, even the most brilliant mind cannot anticipate market trends. It's true; most experts expect current home mortgage rates to start creeping up soon. Indeed, Freddie Mac's Primary Mortgage Market Survey suggests the trend may already have started. But nobody knows for sure, and there's a chance those rates will plateau or even drop a little.
If you think they're more likely to rise -- either slowly or quickly -- and you've been holding off applying for a home loan or refinancing, now might be time to balance your risk and make your move. If that's the case, go ahead and get some competitive mortgage quotes.