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Posted at 05:30 AM ET, 09/20/2012

How low can mortgage rates go?

Mortgage rates have been at or near historic lows most of this year. The 30-year fixed-rate average has remained below 4 percent for all but one week this year. The 15-year fixed-rate average has been below 3 percent since the end of May.

Since last week when the Federal Reserve announced its largest stimulus plan in two years, some have wondered how low mortgage rates will sink. Will we see 30-year fixed-rate mortgages fall around 2 percent?

Unlikely, says Robert Lipnick, an adjunct professor with American University’s Kogod School of Business and chair of the school’s real estate advisory board.

“They’re about as low as they’re going to go,” Lipnick said. “I just have the sense that they can’t be much lower for banks to make the margins to stay in business.”

The Fed’s plan to buy $40 billion in mortgage securities each month for the foreseeable future is intended to provide support for the housing market by encouraging home purchases and refinancing. However, many borrowers are being prevented from taking advantage of the low rates because of insufficient credit scores and/or skimpy down payments.

“The banks are being overly cautious,” Lipnick said. “Lenders got burned, obviously. I think they’re still feeling some of the rawness, if you will, of being burned. It still stings. What you have is this very strict underwriting that hasn’t loosened up. Those really tight standards still prevail.”  

Asked what he thought it would take for lenders to relax their lending standards, Lipnick said: “It’s simply going to take time. Nobody really knows what that time is going to be. I think you’d probably see a loosening more in the Washington, D.C., area because it’s, for the seventh or eighth year in a row, the strongest real estate market in the country. It’s safer to lend people money in this area because the market is so strong. 

“In commercial lending, you’re beginning to see less restrictive underwriting now. Again, it’s not that it’s not restrictive. It’s very restrictive compared to what it was in 2006. But at the same time, it’s not as restrictive as it’s been the last five years.”

Because the Fed said it plans to keep interest rates low through 2015, there seems to be no reason to rush out now to lock in a low rate. It appears these low mortgage rates are going to be around for a while.

“That’s absolutely a fair assumption,” Lipnick said. “There are people that sit on a different side of the fence who say that the Fed is hurting people in business. Borrowing rates are so low and they’re going to stay low so that we don’t have the motivation to do anything quickly. . . . You de-motivate businesses as well as individuals who are looking for a mortgage for a home. We don’t have to do it this fall. We can do it in the spring.”

Lipnick believes that ultimately the Fed’s action will have a positive effect on the housing market.  

“I think we are going to see more first-time new home buyers,” he said. “The American dream of owning your house still exists. . . . The rental market is extremely active. I anticipate that’s going to decline in the Washington area to some degree over the next two to three years and first-time home buyers will increase.”

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By  |  05:30 AM ET, 09/20/2012

 
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