What's Behind Low Mortgage Rates?
May 23, 2010
Mortgage rates in early May 2010 fell to six-week lows, continuing a stretch of historic low rates. The average rate for the benchmark 30-year fixed-rate mortgage was 5.00%, according to Freddie Mac's Primary Mortgage Market Survey. Rates for 15-year fixed-rate mortgages and adjustable-rate mortgages (ARMs) were even lower--3.97% for a 5/1 hybrid ARM.
To put this into perspective, in the late 1970s and throughout most of the 1980s, it was common for a homeowner to have a two-digit interest rate on a home loan. For example, in February 1982, the average interest rate for a 30-year fixed-rate mortgage was 17.60%.
The same week that Freddie Mac reported six-week lows, the news was full of worldwide economic turmoil, particularly over Greece's fiscal crisis. These two events--macroeconomic uncertainty and a dip in mortgage rates--are hardly coincidence.
Why do low mortgage rates tend to come with poor economic conditions, what does that bode for the future?
Mortgage Rates and the Factors that Move Them
As anyone who's shopped for a home loan knows, mortgage interest rates are constantly changing. There are many factors that drive the ebbs and flows of mortgage rates. Some borrowers may ascribe mortgage rate changes to their mortgage lender or mortgage broker. For better or for worse, your mortgage lender or broker doesn't ultimately decide what rate to offer for your home purchase or refinance--larger forces in the economy determine overall movements in mortgage rates.
The major driving force of the moment could be inflation, the strength of the US dollar, or the health of the economy in general. Today, in the aftermath of the 2008 financial crisis and in the midst of a still-rocky economy, we have seen a steady trend of extremely low mortgage rates driven by bad economic news and a low-interest-rate policy by the US government.
When there's bad economic news, the average investor gets jittery about stocks and puts more money in safer investments, such as US Treasury bonds or mortgage-backed securities. This is usually called a "flight to quality" or "flight to safety" and drives up demand for those safer securities. An increase in demand means higher prices, and for bonds, a higher price is equivalent to a lower yield, or interest rate.
Until the end of March 2010, there was another major factor depressing mortgage rates. In the wake of the financial crisis, the US government undertook policies to stimulate economic growth and shake the economy out of recession. As part of this stimulus, the Federal Reserve purchased an unprecedented $1.25 trillion worth of mortgage-backed securities (MBS) over a period of months. Its massive purchase of mortgage debt increased market demand for this kind of debt--lowering mortgage rates.
Lowest Mortgage Rates Won't Last Forever
Although the Fed has completed its MBS purchase program, it has plenty of other policies in place to keep interest rates low. Even so, there's no assurance that low mortgage rates will hang around for long. Already the employment numbers in the US have been perking up, and the uncertainty around European economies could be gone sooner than you think--and strong economic news tends to raise mortgage rates.
"World turmoil and the associated 'flight-to-quality' purchase of American assets by investors is to the benefit of homeowners and home buyers," said HSH.com's Keith Gumbinger. "But this downturn in rates will likely turn around sharply once the issues at hand are resolved."
What does this mean to you? If you're a homeowner with an existing mortgage at a significantly higher rate, think seriously about refinancing to take advantage of current mortgage rates. If you have a fixed-rate mortgage, you could get a lower rate and a lower monthly payment; if you have an adjustable-rate mortgage that is almost through the initial fixed-rate period, you may be able to lock into a fixed-rate loan at today's mortgage rates.
