Why Mortgage Rates Are So Low

by Amy Hoak

Fed policy, concerns about Europe keep rates near record lows.

Glimmers of hope in the housing market suggest a turnaround is near, with statistics showing stabilizing home prices and an increasing number of home sales.

Yet even as housing conditions improve, mortgage interest rates remain near record-low levels.

Rates on a 30-year fixed-rate mortgage averaged 3.71% for the week ending June 21, according to Freddie Mac’s weekly survey of conforming rates. Before that week, rates had broken record lows for six weeks in a row.

It’s a situation that seems to defy supply-and-demand logic: If there’s more demand in the housing market, wouldn’t the cost of borrowing funds to buy a home be on the rise?

Not necessarily.

Mortgage rates are influenced by a number of factors, including policy decisions from the U.S. Federal Reserve and the overall economic picture both in the U.S. and abroad.

The Fed has kept long-term interest rates low, in part through its Operation Twist program, scheduled to end this month, said Frank Nothaft, chief economist at Freddie Mac. Operation Twist involves the Fed buying long-term securities and selling short-term debt. There has been chatter among members of the Federal Open Market Committee about the possibility of extending the program or taking other steps to keep long-term interest rates low, Nothaft said.

The uncertainty in Europe—including continuing worry about whether the euro zone will remain integrated and new concerns about Spain’s economy—also is affecting rates. Out of fear, more investors are moving their money to safe havens, pushing yields on investments such as 10-year Treasury notes downward. The secondary mortgage market uses yields on the 10-year Treasury as a barometer of how to set 30-year fixed-rate interest rates, said Matt Vernon, a mortgage executive at Bank of America Home Loans.

Right now, there’s “rampant uncertainty” about how the story in Europe will play out, so investors are playing it safe, said Michael Fratantoni, the Mortgage Bankers Association’s vice president of research and economics.

The descent of fixed-rate mortgage rates has gone beyond most people’s expectations, however. “Rates have come down far, far more than I would have thought at the beginning of this year,” Nothaft said.

While improvements in the U.S. economy can influence mortgage rates, there simply hasn’t been enough good news domestically to drive mortgage rates higher. “Some of the major housing metrics are better than a year ago,” Nothaft said, including housing starts—the number of new homes on which builders broke ground—and home sales. But they’re still anemic.

Prices seem to have stopped their downward spiral, but homes aren’t appreciating at rates that are normal by historical standards, added Alex Villacorta, director of research and analytics at Clear Capital, a provider of data for real-estate asset valuation.

Clear Capital recently reported that national home prices were up only 0.1% in the second quarter, from the year-early period. That’s far from the 3% to 4% appreciation expected in a healthy market.

“National home prices are up, and that’s the first time that’s happened in some time,” Villacorta said. “This is a necessary first step to this recovery,” he added.

A recent report from Harvard University’s Joint Center for Housing Studies suggests the housing recovery is still in its early stages and faces obstacles, including foreclosure inventory yet to hit the market and the drop in median household incomes.

Given all the factors, the Mortgage Bankers Association expects the 30-year fixed-rate mortgage to end the year at an average 4.2%. That’s higher than current rates, but still relatively low. Freddie Mac’s most recent projection also pegs the 30-year fixed-rate mortgage at 4.2% by year-end.

For borrowers, that means low mortgage rates aren't expected to go away anytime soon. And that’s a good thing since many would-be buyers continue to have jitters about making a purchase, said Ron Chicaferro, a mortgage-industry consultant in Scottsdale, Ariz. Often, worries about job stability are preventing people who otherwise could buy a home from making a purchase.

“The desire is there,” he said, “but the fear prevents the move.”

Those interested in refinancing, however, should be aware that rates are near their lowest points on record, and are expected to eventually start creeping up. So if it makes sense to do a refinance at the current rates, and you can qualify for the loan, it’s a good idea to take action sooner rather than later.

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