Sunday, January 22, 2006
By DEBORAH OESTER Columbian forecaster

After forecasting for three years in a row that interest rates would rise, the prediction in 2005 was half right, but only marginally so.

Rates of 30-year fixed-rate mortgages, the most popular product by far, averaged the same last year as in 2004 and 2003, bouncing between 5.50 percent and 5.875 percent for most of the year. In December these rates increased for a brief time to 6.375 percent, but by year end were back below 6 percent.

Average rates for 15-year fixed mortgages increased for the year by just over one-eighth of 1 percent, staying between 5.15 percent and 5.625 percent until December when they, too, jumped to a yearly high of 5.875 percent for a brief time. One-year adjustable loan rates saw the greatest increase from previous years with the first-year rate averaging slightly above 4.375 percent, up 0.5 percent over the 2004 average. These low rates have again helped the Clark County housing market set records for home sales and new construction in 2005.

The increases last year are a direct result of:

* An improving economy (as a general rule, weaker than expected economic data is good for rates while positive data causes rates to rise)

* The Federal Reserve raising the Federal Funds Rate by 0.25 percent 13 times in two years. The Fed Funds Rate is the primary tool used by the Federal Reserve to influence rates and the economy.

Looking ahead, all sectors of the economy expect growth at a healthy pace.

Gradual increases in mortgage interest rates on all products will continue.

The shorter term products, adjustable rates of one year or less and the interest-only loan programs, will realize the largest increases and will become less attractive as the year progresses.

The 30-year and 15-year fixed rate mortgage rates should experience increases of 0.5 percent in the average rates for the year.

Additionally, in 2006, Fannie Mae and Freddie Mac have raised the limits for single-family residential loans by 16 percent to $417,000. The limit in 2005 was $359,650. This increase was approved by the Office of Federal Housing Enterprise Oversight and is calculated based upon the average home price increases from October 2004 to October 2005.

MORTGAGES: What might happen 20 years from now

First let's look back to 1986 when the Fannie Mae and Freddie Mac loan limit was $133,250, loan products available to borrowers included just 30-year fixed-rate loans, 15-year fixed-rate and one-, three- and five-year fully adjustable rate mortgages, all with 30 year terms. In

1986, the average interest rate on 30-year fixed rate loans was 10.19 percent.

The current conforming loan limit has risen to $359,650. In 2026, conforming loan limits could easily be nearly twice what they are today.

In 2026 because of the increased cost of housing and the increased loan amounts, a greater variety of loan products will be available and pay-back terms of 40 years or longer will be available to help with housing affordability.

In 2026 there will be more diversity in types of housing and much higher density. And, finally, in 2026, Clark County will continue to be a highly desirable place to work and live.

The outlook for 2006

* Gradual increases for all mortgage product loan rates will continue.

* Housing prices are expected to also continue to increase if the economy continues to expand.

* Thirty-year and 15-year rates should increase by 0.5 percent.