Mortgage Rates Trend Downward as a Result of External Factors

Over the last couple months, mortgage rates have beaten a steady decline, down to 5.4%, according to the latest Freddie Mac Weekly Primary Mortgage Market Survey. That marks a tremendous drop – relatively speaking – from the 5.59% notched in June.

The rate quoted above is the 30-year fixed rate, the benchmark of mortgage rates. It should be noted that this is a raw figure, as provided to Freddie Mac directly from mortgage lenders based on the rates paid by their customers. In this case, the average borrower paid .6 points to buy the rate down, which means that the par rate is actually higher. In other words, even if you have perfect credit, you can probably still expect to either pay a higher rate or pay a higher upfront fee.

Meanwhile, variable rate are currently running around 4.5% . If you opt for a 15-year fixed rate mortgage, you can expect to pay 4.46% interest (and .6 points). From this, you can see that the spread between 15-year and 30-year rates is a healthy .58% . In addition, since this lower rate is also spread over a shorter time period, the aggregate savings on interest will be significant over the life of the mortgage. (As an aside, there are other considerations in selecting a mortgage with a shorter term, namely whether or not you can afford the higher monthly payments. Especially given the current economic environment and the uncertain labor market, this is an important consideration.)

There are also wide regional differences concealed in the average figures reported by Freddie Mac, which can sometimes vary by as much as .3% from state to state. Recently, rates in the most distressed markets have tended to be lower than in healthier markets. This is perhaps explicable by lower demand for mortgages in states that have been hit hardest by the bursting of the housing bubble.

So, why have rates headed downwards? As I alluded to in the title of this post, it’s not for the most obvious reasons. In fact, mortgage activity is actually rising: “A four-week moving average that tracks mortgage application activity is up 1.7% overall.  Among refinance applications, that index is up 2.1%, while it’s up 1.2% for mortgage purchase applications.” In this case, an increase in demand hasn’t resulted in an increase in prices.

The reasons are manifold, but can mostly be found outside of mortgages/housing. For example, the Federal Reserve Bank has resumed its purchases of mortgage-backed securities (MBS) in recent weeks, as part of its program to stimulate both the housing market and the broader economy. Given that average mortgage rates rose when the Fed stopped buying MBS, and fell when the Fed started again, it’s obvious that this is an important factor. Another explanation can be found in US Treasury prices, which tend to lead mortgage rates up and down. Recent fears of a prolonged economic recession, low inflation, and a period of continued low interest rates have caused Treasury rates to sag ever closer to the all-time lows of 2008. Investors in MBS – from which the vast majority of mortgage rates are derived – seem to be taking their cues from low Treasury markets, and are buying MBS rates down proportionately.

Whether rates remain low, then, depends directly on the Fed and MBS investors. It seems unlikely that the Fed will continue to buy MBS in bulk, since all of those securities will have to be sold when the recession comes to an end. On the other hand, it’s conceivable that demand for Treasury bonds (and

MBS, by extension) will remain strong for as long as the economy remains weak. Still, as I wrote in the previous rate update, it doesn’t seem likely that rates will trend much lower, which means there’s no reason to delay if you’re thinking about taking out a mortgage or refinancing.