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Mortgage interest rates News: Mortgage rate misconception abounds

December 12, 2013

Mortgage rate misconception abounds   

by Ryan Smith | Dec 12, 2013

Prospective homebuyers may be in for a nasty shock if the mortgage market ever returns to its pre-crisis rates. After a few years of super-low rates, a vast majority of homebuyers think sub-5% mortgage interest rates are normal, according to data released Monday.

In a recent survey, internet real estate brokerage Redfin asked prospective homebuyers what they considered a “normal” interest rate for a 30-year fixed-rate mortgage. A combined 83% of respondents expected a normal rate to fall under 5%.

To put that in perspective, interest rates have averaged around 6.7% since 1990. Prior to March of 2009, they had never fallen below 5%, according to Redfin. In the 1980s, rates bounced anywhere from the giddy heights of about 18% to around 10%, according to data from the Federal Reserve Bank of St. Louis – but they never even got within shouting distance of 5%.

“Clearly, the Fed’s easy-money policies since the housing crash have trained buyers to expect mortgage rates that start with threes and fours,” wrote Redfin’s Ellen Haberle in the report. Homebuyers are also exhibiting “a high degree of intolerance toward mortgage rate fluctuations,” Haberle reported; more than 40% of survey respondents said they wouldn’t buy a home if rates rose much further.

That’s bad news for a Fed looking to taper its $85bn-per-month bond-buying program while keeping economic recovery rolling. When the Fed tapers, rates will rise, likely stalling mortgage lending. Just talk of a possible September taper caused rates to spike by more than a full percentage point over the summer, strangling the refi boom and prompting big lenders to lay off thousands of mortgage employees. Meanwhile, the number of new homes sold in the US dropped 13.4% between June and July, according to Redfin.

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