As housing conditions continue to improve, mortgage interest rates remain near record-low levels. Amy Hoak with MarketWatch has shared an article regarding the reasons behind why rates are staying this low.
Rates on a 30-year fixed-rate mortgage averaged 3.71% for the week ending June 14, 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?
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.
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.