Will Year Of The Rabbit Bring Prosperity?

By Lisa Scontras

Tourism is rebounding and the economy is improving. Consumer confidence is high. And while no one is expecting a speedy recovery, 2011 is off to a bullish start. “I think the worst is behind us,” says Jeff Bamer, vice president, secondary market at First Hawaiian Bank.

Bamer characterizes the upcoming year with rising mortgage interest rates and hopes for success from a new 2011 stimulus program, aimed at reducing unemployment. And while he says there won’t be a rapid, dramatic recovery anytime soon, he is optimistic.

The Fed’s recent commitment of $600 billion, referred to as QE2 or quantitative easing, is slightly different than the government programs of 2010, targeting a different segment of the economy.

The $1.25 trillion spent in 2009 and 2010 was used to purchase mortgage- backed securities and specifically targeted to boost the troubled housing market nationwide by keeping mortgage interest rates low.

“The $600 billion in this year’s program is being used to purchase Treasuries,” says Bamer. “These are intended to help reduce short-term interest rates. By doing this, the Fed is trying to help small businesses hire and improve the jobs market.”

The program will not necessarily help reduce longer-term rates like mortgages, he predicts. In fact, if QE2 is successful in lowering unemployment, mortgage rates will likely rise.

Interestingly, as the U.S. economy recovers, mortgage interest rates will return to more “normal levels.” The biggest question looking ahead may be exactly how much will rates rise in 2011?

“Most experts expect mortgage rates to rise in 2011,” says Bamer. “The historically low interest rates we’ve enjoyed were caused by the economic woes of the past couple of years.

“The forecasts vary, but the average is around one-half percent higher than where they are now,” he says. “Rates are still very low, historically speaking. Mortgage rates hit levels not seen since the 1950s last year due to extraordinary circumstances and some government intervention.”

With the rate of interest charged by a mortgage lender on the rise, homebuyers are expected to see the value in jumping back into the market. In fact, another sign of recovery will be when homebuyers decide to lock-in their interest rates before they climb. “Reducing the national unemployment rate is key to our economic recover now and the focus of the Federal government,” says Bamer. “If they are successful in getting people back to work, the demand for housing will increase.” Inflation is something to watch out for this year. QE2’s infusion of money could result in inflation, according to Bamer. He says that is what contributed to the increase in mortgage rates recently.

Bamers advice is simple and has to do with the fact that mortgage rates are a key component to home affordability. Because the rate of interest paid on a mortgage influences the cost of homeownership, it has a profound effect on the housing market.

“We have likely seen the bottom in both interest rates and home prices,” says Bamer. “Both are expected to go up gradually. Housing may never be this affordable again.”