Say Goodbye to the Lowest Mortgage Rates in History

The market is at a turning point for the worse due to growing worries about inflation. While it is not a problem right now (although the consumer price index did just rise the most in 10 months), there are several strong economic factors emerging that typically lead to higher prices to the consumer and thus higher mortgage interest rates down the road. While the Federal Reserve said they wouldn't raise rates until 2014, Mark Zandi, chief economist at Moody's Analytics and many more economists don't believe that they'll be able to stick to that promise. A stronger dollar, improving jobs markets, and rising commodity prices (like food and oil) are adding to pricing pressures on everyday goods leading to inflation. As a result, the Fed could be forced to raise interest rates sooner than expected to keep inflation in check. Before the Fed raises rates, the markets will be the first to react; and they are. They will do this by selling off treasury bonds; and they are. As they do this, the yield on long term treasuries will rise and when the yield rises, so will long term mortgage interest rates. Here's a long term mortgage interest rate forecast by FFC:

A consumer's experience with inflation is very different. What matters most to people is that they're paying a lot more for food, gas, education and especially rent. Let's take rental rates in the Minneapolis-St. Paul market. Year-over-year, rental rates are up 11 percent! This chart shows how bad rental rates in Minneapolis-St. Paul are by comparison to national averages:

It will be tempting for would-be homebuyers to get discouraged with mortgage interest rates increasing but they should remember that at the same time rates are going up, housing affordability is at new records due to steep drops in home prices. Also, some buyers will get skittish over this and stay on the sidelines of the housing market which will not only hurt them in the long run (by leaving them with an even higher rate) but also put the buyers that don't hesitate in a much better position to get sales concessions when they buy their new home in the short-term or intermediate term. This turn of events could actually be a good thing for those in the market for a new home now. Happy House Hunting!