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Freddie Mac: Mortgage interest rates will hit 40-year low in 2016

GSE predicts best year for home sales since 2006

If current trends hold steady, this year could prove to be a banner year for housing, Freddie Mac said in a new report.

In Freddie Mac’s new monthly outlook report, the government-sponsored enterprise states that it is currently projecting a “surge” in mortgage originations during the third quarter, further reinforcing its view that 2016 will be the “best year” for home sales since 2006.

Additionally, Freddie Mac’s current forecast is for the interest rate on the 30-year fixed-rate mortgage to finish the year with an average of 3.6%, making 2016’s mortgage rates the lowest in more than 40 years.

Previously, the lowest annual average happened in 2012 when the average hit 3.66%.

And Freddie Mac doesn’t expect the interest rate to increase much in 2017, either.

The GSEs current forecast shows the interest rate for the 30-year fixed-rate mortgage to finish 2017 at an average of 3.7%, hitting 3.9% during the year.

Freddie Mac also stated that it continues to expect mortgage originations to top $2 trillion this year, which would be the first time originations have been that high since 2012.

“Mortgage originations are expected to surge in the third quarter, reflecting the impact of Brexit in recent mortgage activity,” Freddie Mac Chief Economist Sean Becketti said. “We continue to believe that originations will reach $2 trillion this year, the highest since 2012.”

Freddie Mac’s forecast shows that mortgage originations in the third quarter will increase by $60 billion, or 11%, over the second quarter.

But Freddie Mac cautions that originations will calm down eventually.

“With rates rising modestly over the next few quarters refinance, activity will likely decline,” Freddie Mac states in its forecast. “Purchase originations will rise, but not enough to offset the decline in refinance activity.”

Freddie Mac’s forecast shows that total originations will fall by $350 billion to $1.65 trillion in 2017.

Freddie Mac also noted that it is revising its forecast of home price appreciation up to 5.6% and 4.7% in 2016 and 2017, respectively, which is up from last month's forecast of 5.3% for 2016 and 4% for 2017.

Becketti also called housing a “bright spot” for the economy, as low interest rates counteract rising house prices to keep housing affordable for some buyers,

"The housing market remains a bright spot for the U.S. economy, with solid job gains and low mortgage interest rates sustaining the economy's momentum in September,” Becketti said.

“In most markets, low mortgage rates have more than offset the rise in house prices, preserving homebuyer affordability for the typical household,” Becketti continued.

“Homeowners are also taking advantage of low rates and house price appreciation that is increasing their home equity,” Becketti added. “The share of cash-out refinances grew to 41% in the second quarter of 2016, compared to 38% in the first quarter and 15-20% during the housing crisis.”

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