Dirt-Cheap Mortgage Rates: Here for How Long?
Luke Mullins

 

Although economists have grown increasingly concerned that the real estate market may slip into a "double-dip" recession, today's consumers are being handed a tempting incentive to buy property or refinance their home loans: ultra-low mortgage rates. Rates on 30-year fixed mortgages fell to 4.57 percent for the week ending July 15. That's down a half percentage point from three months earlier and the lowest level in the 39 years that Freddie Mac has been monitoring rates. "It's really what you could call a once-in-a-generation opportunity for [low] financing costs," says Mike Larson of Weiss Research. Here's a look at the forces that have created the current mortgage-rate environment, the direction rates are headed, and what you need to know to take advantage of them.

Weak U.S. economy: Mortgage rates have dipped to record lows in large part because "frankly, the economy is lousy," says Keith Gumbinger of HSH Associates, a publisher of consumer loan information. The national unemployment rate remains uncomfortably high at 9.5 percent, and Nomura Securities expects forthcoming data to show that U.S. economic growth slowed in the second and third quarters. A weak economy puts downward pressure on mortgage rates in several ways. "First and foremost, demand for credit is low," Gumbinger says. As a result, lenders in many cases must reduce rates to attract borrowers. "Basic supply and demand," Gumbinger says.

At the same time, a sluggish economy works to ease investor concerns over future price appreciation. "The other part that controls long-term interest rates is inflation expectations," says Brad Hunter, the chief economist at Metrostudy, a firm that researches the housing industry. "And I believe that the bond market sees very little inflation in the near term." Zach Pandl, an economist at Nomura Securities, agrees. "The risk today is of excessively low inflation," Pandl says. "There is no inflation on the horizon." As such, Pandl expects the Federal Reserve to hold its benchmark federal funds rate in the current zero to 0.25 percent range for the foreseeable future.

European debt crisis: Developments in the global economy have created additional downward pressure on home loan rates. When the shaky balance sheets of several European countries spooked financial markets in late spring, investors scurried out of risky assets like stocks and into U.S. Treasury bonds. As demand increased, yields on 10-year treasuries fell to 3.05 percent for the week ending July 16, down from 3.85 percent three months earlier. And since fixed mortgage rates tend to track the yields on 10-year treasuries, home loan costs declined significantly as well.

The European debt crisis also juiced demand for another class of assets that has helped bring down mortgage rates. With stocks looking increasingly risky, investors began searching for safe places to park their money. "What they really want to do is buy something that is government-guaranteed," says Guy Cecala, the publisher of Inside Mortgage Finance. "And there really are only two choices: Treasury securities, which have a very low yield, or going for a little higher yield with [Fannie Mae or Freddie Mac mortgage backed-securities]." While many investors purchased U.S. Treasuries, others -- tempted by the possibility of slightly higher returns -- took the second option. The subsequent "huge" demand worked to reduce the yields on these mortgage-backed securities, which translated into lower rates on home loans, Cecala says.

Outlook: Although mortgage rates may increase from these record lows by the end of the year, they are likely to remain in an attractive range, Hunter says. "But I think that probably we will get a modest increase in long-term interest rates by the end of next year," Hunter says. "By then, the economy will have started creating jobs and [have] started to take up some of the slack capacity in industrial production." Thirty-year fixed mortgage rates could approach 6 percent by the end of 2011, he says.

Lock or wait?: Could rates move lower from current, ultra-low levels? Sure. If the U.S. economy slows sharply or a fresh crisis rattles global confidence, consumers could see financing costs become even cheaper. But given that rates are now sitting near 40-year lows, you're better off locking in a rate today rather than holding out for a better deal. "The likelihood of getting a significantly lower interest rate is pretty slim," Gumbinger says.

But that doesn't mean everyone will be able to get their hands on today's lowest financing costs. After getting hammered by bad loans made during the housing boom, banks have increased their lending standards for borrowers of all stripes. To obtain today's best rates on a home purchase loan, borrowers will typically need a FICO score of 720 or higher, a down payment of around 10 percent -- although it could be significantly higher in certain markets -- and fully documented income and assets, Gumbinger says. For the best rates when refinancing your home, you'll generally need a FICO score of 730, at least 20 percent equity in your home, and at least two years of tax returns, Cecala says.

 

 

Dirt-Cheap Mortgage Rates: Here for How Long?

 

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