What's Next for Interest Rates?

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Freddie Mac has placed its bet on where interest rates are going, and it's higher.

The average 30-year, fixed-rate mortgage rate will be 6 percent by the fourth quarter of this year, according to Freddie's recently released "January 2010 Economic and Housing Market Outlook."

The average rate was 4.96 percent for the week ending January 14, according to the latest Freddie Mac mortgage survey. But it may be one of the last weeks for rates under 5 percent. Freddie predicts steady increases over the next year as rates rise from their record low of 4.71 percent this December.By the end of the first quarter, the Treasury and the Federal Reserve will finish buying up mortgage-backed securities and Fannie Mae and Freddie Mac debt, a trillion-dollar effort that has helped keep mortgage rates low despite the financial crisis. Federal officials plan to hold onto the bonds and loans they have already purchased. Still, the end of new purchases could leave a hole trillions of dollars deep in the bond market. With fewer buyers, the price of the bonds could drop, pushing interest rates up for borrowers.

To lessen the pain, the government plans to taper off its purchases of the bonds, as they did with their purchases of Treasury securities, which ended with no adverse market response according to Fed officials. Also, the government has pledged to cover Fannie Mae and Freddie Mac's losses -- this makes their mortgage-backed securities almost as safe as Treasury bonds, and should help new investors get comfortable buying them in bulk. These measures are some of the reason Freddie Mac economists don't rates to get much higher the 6 percent.
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