By most estimates, mortgage rates were expected to climb this year, with rates on the 30-year fixed-rate mortgage predicted to exceed 5%. Instead, rates are now lower than they were this time in 2013 — much to the advantage of mortgage shoppers.
There are a few reasons why higher rates never came to pass.
Rates on the 30-year fixed-rate mortgage averaged 4.15% for the week ending July 10, according to Freddie Mac’s weekly survey of conforming mortgage rates. A year ago, rates averaged 4.51%.
“In January, we were projecting at the end of the year that the 30-year would be 5.1%,” said Leonard Kiefer, deputy chief economist with Freddie Mac. “We most recently revised that down to 4.4%.
Supply and demand
Economists had largely expected rates to rise once the Federal Reserve indicated it would taper its purchase of mortgage-backed securities through its quantitative easing program, Kiefer said. Rates did, in fact, rise spike upward due to that indication last summer.
But when the Fed actually began purchasing fewer of these securities, mortgage rates began to fall. That’s because the tapering ended up coinciding with a reduction in mortgage originations — which means fewer mortgage-backed securities were being issued, Kiefer said.
“The Fed’s ‘demand’ for new mortgage-backed securities has declined less than has the new ‘supply,’” Kiefer and chief economist Frank Nothaft wrote in a recent outlook.
And that’s keeping rates down.
Fewer mortgages are being originated in large part because refinance activity is down; with rates no longer at record lows, there are fewer homeowners interested in refinancing these days. Also, while the housing market is improving, there hasn’t been an abundance of first-time home buyers in the market today, and that has been a drag on housing, said Ted Ahern, chief financial officer of mortgage lender Guaranteed Rate.
“There’s not a big supply of mortgages being originated, so that in and of itself kind of keeps the rates down,” Ahern said.
Another reason for the supply/demand imbalance: Global investors buying mortgage-backed securities, said Dan Green, chief publishing officer of The Mortgage Reports, a mortgage blog.
“Wall Street planned for the end of QE3 in a vacuum. There was no consideration given to the health of domestic and global economies or to market-destabilizing geopolitics,” Green wrote in an email interview. “The Fed has been exiting the market exactly as forecast, but not as quickly as global investors have joined. Demand for mortgage-backed securities still outweighs supply, which has lowered consumer mortgage rates.”
Low inflation, a weaker-than-expected economy in the first quarter and a “decent, but not great” housing market are also forces contributing to keeping mortgage rates low, Ahern said.
If you’re mortgage shopping
Eventually mortgage rates will go higher — unless there’s some sort of slowdown in economic growth, a recession or some big shock to the economy, Kiefer said. “It’s likely to be gradual, but [rates are going] up, for sure,” he added.
Once it’s clear the economy is expanding, mortgage rates should be on their way up, Green said.
In fact, those in the market for a mortgage may want to pay close attention to any marked improvement in the job numbers and any increases in inflation, Ahern said. Those are likely to be tell-tale signs that rates are heading up, he said.