What's in Store for Interest Rates?



Average interest rates crept up from last week's record low, according to the economists at Freddie Mac.

The average interest rate for a 30-year home fixed-rate mortgage climbed to 4.81 percent, according to the Freddie Mac's Primary Mortgage Market Survey, released December 10. That's up from 4.71 percent the week before

But don't worry if you're looking for a mortgage rate - interest rates are still incredibly low compared to recent years and could easily fall again and set new records this year.
What happened to push rates up? Average mortgage rates tend to float a point or two higher than the yield on 10-year Treasury bonds. The yield on those bonds rose last week from 3.38 percent December 3 to 3.48 percent December 10. That's an increase 0.1 percent - exactly the same as the average increase in mortgage interest rates, according to Freddie Mac.

"Following an upbeat employment report, long-term bond yields rose slightly and fixed mortgage rates followed," explained Frank Nothaft, Freddie Mac chief economist. "The economy shed only 11,000 jobs in November, far fewer than the market consensus forecast, and the unemployment rate unexpectedly fell to 10%. In addition, revisions added 159,000 jobs to September and October."

Good economic news tends to push long-term interest rates higher. That's because investors tend to sell their long-term bonds and put their money into short-term investments like the stock market. On the whole, the Dow Jones Industrial Average rose over the week, from 10,366 on December 3 to 10,406 on December 10.

So if you're waiting for the best interest rates, you're in an odd position. You should hope for bad economic news that's just scary enough - but not too scary - so that a few investors sell their short-term investments and buy some nice, safe, long-term bonds instead. That could drive long-term interest rates back down again.

But don't wait too long. Eventually, long-term rates will rise back up to 5 percent, and then 6 percent, and then 7 percent... Average interest rates have never been lower since Freddie Mac started keeping track in 1972 - with the exception of last week. These low rates can't last forever.

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