Where are mortgage rates headed in 2014?

Around this time last year, I forecast that mortgage rates would increase in 2013. Back then, rates on a 30-year fixed mortgage were hovering around 3.5 percent. I predicted that we would see a gradual rise in 2013 to 4 percent or so.

Well, I called the direction right – rates did in fact go up in 2013. But I missed a bit on the amount of the rise, with interest rates on a 30-year fixed loan finishing the year at 4.48 percent. This is based on the Freddie Mac Primary Mortgage Market Survey, and includes 0.7 points paid at closing as of the end of 2013.

So where will rates be headed in 2014? The answer lies in one’s view on the U.S. economy. The economy has been stuck in one of the slowest post-recession recoveries in the history of the country, but it is gradually starting to mend. It’s been about five years since the financial crisis, and we are starting to see all the key indicators slowly recovering and moving in the right direction – albeit very modestly.

Let’s start with the gross domestic product, or GDP. According to the U.S. Bureau of Economic Analysis, GDP grew 2.4 percent in the fourth quarter of 2013, and 4.1 percent in the third quarter. These two most recent quarters demonstrate an uptick from the 1 percent to 2 percent growth that we’ve been experiencing for the past several years, but it’s still short of the 4 percent to 5 percent growth that you’d expect to see after such a severe recession.

Next let’s look at the unemployment rate. The good news is that the unemployment rate has slowly declined over the past year and is now sitting at 6.7 percent as of February, according to the U.S. Bureau of Labor Statistics. And that’s down from a recent peak of 10 percent back in October 2009.

The bad news is that the number of jobs being created per month is still relatively low, in the 100,000 to 200,000 range, instead of the 200,000 to 400,000 range that you’d need to see as part of a strong recovery. And when you peel back the onion, the numbers show that much of the improvement in the unemployment rate is coming from people quitting their job search and taking themselves out of the labor market.

The unemployment rate is critical since it is one of the main metrics that the Federal Reserve is prioritizing as a trigger to determine whether it should tighten the money supply, which ultimately raises interest rates.

The Fed has been artificially propping up the economy with a stimulus program known as “Quantitative Easing,” or QE 3. Some have sarcastically referred to it as “QE Perpetuity” since it has no formal end date built into the program, which is unprecedented.

The Fed has been essentially printing money to put more dollars in the economy, also known as loosening the money supply. They did this by buying $85 billion a month of mortgage bonds and U.S. treasury bonds for the majority of 2013.

And when the Fed buys all of these bonds, it pushes bond prices up, and correspondingly pushes interest rates down. So, it’s really critical to try to figure out what the Fed is going to do in 2014 in order to make an educated guess on where mortgage rates will be headed.

At their last two meetings, Fed officials announced a much-anticipated “tapering” of the program, where they’ve pared back this bond-buying program to $75 billion a month in January and $65 billion in February.

Part of their rationale for doing so is evidence of the upticks in GDP growth and reductions in the unemployment rate. We are now at 6.7 percent unemployment rate, and their goal is to get it down to 6.5 percent or lower. Since we’re very close to their goal, it’s reasonable to expect that the Fed will continue to pare back purchases of bonds throughout 2014 as long as GDP continues to grow and unemployment rates continue to decline. Most economists anticipate they will pare back to $55 billion in March and to zero bond buying by the end of this year.

From a macro view, my opinion is that we will see continued momentum in the economy in 2014. Consumer confidence has risen since the depths of the financial crisis; GDP is modestly growing; unemployment rates are slowly coming down; and the stock market has recovered, which tends to create a “wealth effect” where people feel richer and therefore are inclined to spend more.

But I believe that it’s going to continue to be a slow recovery and that the Fed will not take drastic actions in response to the continued modest growth that I’m predicting. If I’m right, we’ll most likely see slow but steady continued growth in the economy and, as a result, very measured moves by the Fed to slowly tighten the money supply and therefore gradually increase interest rates.

If I’m wrong, and the economy starts to boom, then all bets are off, and we could see a significant spike in interest rates.

Bottom line, I predict we’ll see a continued rise in rates in 2014, moving up from approximately 4.37 percent on Thursday for a 30-year fixed rate mortgage to the 5 percent to 5.5 percent range by year-end. And remember, if I’m right, these mortgage rates will still be very low in comparison to the long-term historical range of 6 to 8 percent. So if you’re thinking about refinancing your mortgage or buying that new home, it’s still a great mortgage market relative to what your mom and dad had to pay.

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Tom Reddin, former president of Charlotte-based LendingTree, writes an occasional column for MoneyWise about mortgages and homeownership. A version of this column previously appeared on his blog, He runs Red Dog Ventures, a venture capital and advisory firm for early stage digital companies. Follow him on Twitter at @USRates.