Mortgage Rate Predictions for the New Year

by Joe Taylor Jr.
joe.taylor@californiamortgagerate.com
CMR Columnist

New Federal Reserve Board leadership and a stable economy could ease mortgage rates in the coming months.

While mortgage rates have climbed to recent highs in the past few months, many experts predict that 2006 will bring an end to government rate hikes. When the Federal Reserve announced another increase in benchmark funds rates in mid-December, language in its announcement indicated that the Fed’s tightening might soon be ending.

In mid November, rates for 30-year mortgages increased to 6.37 percent, the highest rate in two years. Even though the rates declined slightly toward the end of 2005, most analysts predict that rates will level off after another slight increase in the first quarter of 2006.

The economy has appeared strong, despite negative economic forecasts in the wake of hurricanes Katrina and Rita and skyrocketing energy costs this winter. Average home sales have slowed after a five-year surge, which could take pressure off the Fed to continue increasing mortgage rates.

Other analysts are more cautious, holding back their mortgage rate predictions until they learn more about our country’s new financial leadership. Markets anticipate few major policy shifts when new Fed chairman Ben S. Bernanke takes over from Alan Greenspan early next year. Bernanke will attend his first policy-setting meeting in late March, when analysts expect another rate increase.

Analysts say that if mortgage rates increase too quickly, a resulting inflation could hurt home sales. If the Fed increases rates too sharply, a lack of funding for new housing could also be a factor in an economic recession.

Overall, predictions for mortgage rates in 2006 remain mixed. A strong Christmas shopping season and continued robust worker productivity could signal a strengthening economy. If the Fed can continue to control inflation, we could see mortgage rates topping off at around 7 percent in 2006.

About the Author

Joe Taylor Jr. coaches musicians, entrepreneurs, and other creative adults that want to shift their careers. He holds a Bachelor of Science in Communications from Ithaca College.