The economy improves

 

If you want to know what will happen to mortgage rates in 2011, watch what happens to the economy.

As we write this, the economy has put in about six quarters on the positive side of the economic ledger, and Federal Reserve stimulus and the recent tax agreement seem likely to ensure that growth continues on an upward track in 2011. The labor market recovery should continue to gain momentum as the year progresses, but unemployment will remain stubbornly high for perhaps years to come.

That said, continual but gradual improvement seems likely. As the economy finds firmer footing, so will mortgage rates. After being pressed to 56-plus-year lows in 2010 by various crises, deflation concerns and government manipulation, we may see a bit of the other side of the coin in 2011. Although the Fed will keep short-term interest rates low, it is unlikely to leave them at emergency levels forever; as the economy recovers, the market will probably demand that the Fed begin to raise short-term interest rates and back off on policy “accommodation” in order to avoid an inflation problem.

Because it would tend to temper any outsized growth potential, which in turn would trim inflation concerns, any rise in short-term rates (whether directly or through the process of managing currency reserves) should keep long-term mortgage and other interest rates from rising too far. As we begin 2011, mortgage rates have moved off recent bottoms and have probably overshot where they should actually be, given current economic conditions.