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Mortgage Q&A: May rates stay low in new year

- - Thursday, December 27, 2012

Perhaps it's appropriate for my last column of 2012 to talk about the so-called "fiscal cliff." With any luck, our elected officials already will have reached some sort of reasonable agreement by the time this is published. As I write, both sides still are pretty far apart.

The fiscal cliff is a coined term that economists use to describe a free-fall into another recession in 2013 that they see happening unless Congress and the White House do something about the combination of spending cuts and tax increases that are due to occur automatically at the end of the year.

In typical political fashion, the Democrats want to tax more and spend more, and the Republicans want to tax less and spend less. Wherever you are on the political spectrum, both sides are easy to understand. It's the outcome on which everyone appears to disagree.

The Republicans say an increase in taxes will leave less money in the consumer's pocket, creating less spending and hiring, which ultimately will hamper economic growth and hurt the job market's recovery. Government spending, many Republicans say, is largely inefficient and wasteful.

Democrats counter that huge spending cuts will eliminate necessary services, harm the poor and put an even larger burden on the middle class. Similarly, tax cuts will force the government to borrow more, increasing our already gargantuan debt.

These arguments have been going on for 236 years.

So what is in store for us in 2013? I certainly don't know, but I do hope mortgage rates don't rise.

A few weeks ago, I wrote a column describing the circumstances of a typical first-time homebuyer in 1987 versus 2013. The numbers proved that housing is more affordable today despite a huge increase in price.

The bottom line was that it is cheaper to purchase a home today for $275,000 with a 5 percent down payment than it was to purchase a home for $170,000 back in 1987. With the elimination of various costs, accompanied by interest rates that are almost one-third of 1987 levels, today's homeowners need less cash and have a lower monthly payment than those who purchased in 1987.

It's no wonder that Fed Chairman Ben S. Bernanke is so gung-ho on keeping rates down. After running some numbers, I see that if interest rates move up by 3 percentage points, a typical mortgage payment will jump by more than 40 percent. That surely would knock out a huge segment of the buying market, which would cause home prices to fall again.

The only time I have ever gone out and publicly predicted the future was back in 2004, and then again in 2005 when I predicted that the real estate market would collapse. I was early, but I was right. I have no idea what to expect in 2013, so I'll just wish readers a happy, safe and prosperous 2013.

Henry Savage is president of PMC Mortgage in Alexandria. Send email to henrysavage@pmcmortgage.com.