Throughout the year, mortgage rates have defied expectations.
House hunters who were bracing for rates to increase instead saw them fall and then plateau in recent months, settling in at their lows for the year. The trend continued this week, with the average rate on a 30-year fixed rate mortgage at 4.12 percent, barely budging from 4.10 percent last week, according to a closely-watched Freddie Mac survey.
Many firms regularly track interest rates and come up with a slightly different numbers because they survey different lenders at different times of the day or week. But most of them don’t expect rates to change much any time soon, and they’ve adjusted their forecasts to reflect that.
Early in the year, when it looked like the economy might pick up steam, Freddie Mac expected that the average rate would rise to 5.1 percent by year’s end. Since then, it has pulled back its projection to 4.3 percent, said Len Kiefer, Freddie’s deputy chief economist.
Kiefer noted that rates on a 30-year, fixed mortgage have not moved more than a tenth of a percentage point on a week to week basis all year — a first since 1977, and there’s no reason to expect they will move much as the year winds down.
The recent flat-lining of mortgage rates has to do with the U.S. economy’s lackluster growth, as well as political tensions around the world.
Late into the 2008 financial crisis, as part of a broad push to stimulate the economy, the Fed began buying a sizeable chunk of treasuries and mortgage-backed securities issued by firms such as Freddie and Fannie Mae. The purchases pushed interest rates reliably below the 6 percent mark for the first time in years.
The Fed conducted two more rounds of purchases — the most recent one beginning in fall 2012 -— that caused mortgages rates to fall to some of the lowest levels ever recorded. The average rate on a 30-year, fixed rate loan dropped to an all-time low of 3.31 percent the week of Nov. 21, 2012.
It was widely believed back then that the Fed would scale back its purchases once the economy improved and private buyers of mortgage-backed securities returned to the market. But the timing of the pullback was up in the air until June 2013, when the Fed signaled it would soon start to trim its purchases. The market got spooked. Rates started rising, peaking at 4.58 percent in August of that year, nearly a full percentage point higher than a year earlier.
“With the Fed moving away, it was feared that the private market would not have the capacity to step up and buy the securities,” which totaled about $1.5 trillion that year, said Keith Gumbinger, a vice president at the mortgage research firm HSH.com.
As it turned out, however, the supply did not overwhelm demand because the higher interest rates discouraged people from refinancing or buying homes, and the volume of mortgage backed securities dwindled, Gumbinger said. In the meantime, the economy improved. The Fed began scaling back its purchases in January, and economists began predicting that rates would rise further.
“When the economy is doing better, people take more risks and demand more homes, which pushes up mortgage rates,” said Kiefer of Freddie Mac. “When the economy is not growing, it keeps interest rates down.”
But optimism about the economy faded this year after a brutal first quarter, when the economy contracted. The bad economic news helped keep rates low for the first half of the year, and international events are expected to keep them down through December.
With unrest in the Ukraine and the Middle East, and economic turmoil in some European countries, investors across the globe are clamoring for relatively safe U.S. bonds. When demand for long-term bonds is high, the yield falls on long term investments. That ultimately translates into lower rates on 30-year, fixed rate mortgages, which are long-term investments.
But just because rates are low, that doesn’t necessarily mean that people should be scrambling to buy a home, said Greg McBride, chief financial analyst at Bankrate.com.
“I don’t think you should rush to buy a home out of concern about mortgage rates any more than you should rush to get married because there’s a sale at the bridal shop,” McBride said. “You should buy a house when you’re financially ready to do so and your life circumstances dictate it.”
And thank your lucky stars that you’re not dealing with 1980s-era rates.