Before presenting rate predictions for 2011, it's worth noting that all forecasts are subject to the whims of highly volatile rate markets. What follows is an explanation of how rate markets work, how rates have behaved since the financial crisis began in 2007, then the outlook for this year.

All rates discussed are 30yr fixed rates on single family home loans up to $417,000, and assume at least 20% down payments. Rates are lower for bigger down payments. Rates are higher for condos and loan amounts above $417,000.


How Rate Markets Work
Home mortgage rates are derived daily from yields on mortgage bonds. Here's what that means: A bond is like a loan. A bond investor is the lender and a bond issuer like Fannie Mae is the borrower. The investor pays Fannie Mae a certain price for the bond then receives an annual interest payment (called a yield or rate) on that bond they own. As mortgage bond prices trade up and down each day, that yield moves inversely. So if economic news is bad, bonds get bought, prices rise, and yields (or rates) drop. And if economic news is good, bonds sell, prices fall, and rates rise. All U.S. lenders update mortgage rates throughout each day based on whether mortgage bonds are trading up or down on the day's economic data. ...