Mortgage Rates at Lows for Year

Amidst the continued weak economy, mortgage rates have dropped for four weeks in a row to their lowest point this year, according to Freddie Mac’s Primary Mortgage Market Survey that was released on June 2, 2011.

Rates on 30-year fixed-rate mortgages averaged 4.55 percent with an average 0.6 point for the week ending June 2, down from 4.71 percent last week and 5 percent a year ago.

The 30-year fixed-rate mortgage hit an all-time low in Freddie Mac records dating to 1971 of 4.17 percent during the week ending Nov. 11, 2010, and so far this year has ranged from 4.71 percent in early January to a high of 5.05 percent in February.

Rates on 15-year fixed-rate mortgages averaged 3.74 percent with an average 0.7 point, down from 3.89 percent last week and 4.36 percent a year ago. This is a new low for 2011, but it is well above the all-time low in records dating back to 1991 of 3.57 percent, set in November.

Rates on 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) loans averaged 3.41 percent with an average 0.6 point, down from 3.47 percent last week and 3.97 percent a year ago. The 5-year ARM hit a low in records dating to 2005 of 3.25 percent in November.

Rates on the 1-year ARM loans averaged 3.13 percent with an average 0.6 point, down from 3.14 percent last week and 4.07 percent a year ago.

Some analysts are anticipating an upward movement in mortgage rates. Mortgage applications have been rising, according to the Mortgage Bankers Association’s Weekly Mortgage Applications Survey. Also, the number of borrowers looking to refinance is currently at its highest level since the second week of December. Mirroring the steady decline in rates, refinancing activities have increased 35 percent over the past seven weeks. However, refinancing is only at 50 percent the level it reached during the fall of 2010, when mortgage rates fell to their record lows.

Despite an uptick in refinance activities, the low mortgage rates haven’t been good enough to nudge the weak housing market. According to the National Association of Realtors, fewer people bought previously occupied homes in April. Sales fell to a seasonally adjusted annual rate of 5.05 million units, which is far below the 6 million homes a year that economists consider a healthy housing market.

Despite the lackluster housing news, Freddie Mac’s Vice President and Chief Economist Frank Nothaft highlighted one positive observation.   "Households have been strengthening their balance sheets over the past year," he said. "The New York Federal Reserve Bank reported that the serious delinquency rate (90 or more days delinquent plus foreclosures) on first mortgages and closed-end home equity loans balances fell to 7.46% in the first quarter from a peak of 8.89% the same period last year. This suggests there may be fewer distressed sales later this year." Distressed houses have accounted for a much higher than normal share of all homes on the market for the last year, and a reduction in their number would help stabilize home prices, which have been falling since last summer.

What happens to mortgage rates after QE2 ends in June?

As far as federal agencies are concerned, none of them have a bigger clout than the Federal Reserve. It is said when the Feds sneeze, the world economy gets hiccups. Their policies affect everything from the milk we buy at the grocery store to the interest rates of a 30-year mortgage.

It is no wonder that Quantitative Easing 2 or QE2 is one of the hotly debated topics these days? So what in the world in QE2? Simply put, it is an attempt by the Feds to jump-start the sluggish economy by pumping billions of dollars into the financial markets.

Under normal circumstances, if the central bank wants to stimulate economic growth, it simply lowers interest rates, which in turn increases the money supply and infuses cash into the real economy. The domino effect occurs when people borrow this increased amount of available cash and banks lend it, which eventually sputters the economy back to normal growth patterns. However, this only happens in normal market conditions. But the market situation in the U.S. is far from normal these days.

Back in 2008 the feds lowered the short-term interest rate target to near 0%, but the economy continued to be sluggish and has not gained any traction since. So, when the central bank exhausts all its options to influence interest rate movements, it engages in a process known as quantitative easing. The goal of quantitative easing is to increase the money supply by purchasing Treasury securities. This increase in money supply is meant to ease the financial burden on banks. As pressure is alleviated from banks, they will be encouraged to lend money to people seeking small business loans, mortgages, auto loans, etc.

Between November 2010 and Junes 2011, the central bank will invest $600 billion in long-term bonds. The bond/treasury purchases are aimed at stimulating the economy. By buying Treasuries, the Fed intends to soak up supply and push their prices up. Because interest rates move inversely to bond prices, interest rates move down. Mortgage rates, corporate bond rates and other interest rates will go down, or at least be lower than they otherwise would be.

But now that the central bank's bond-buying spree is drawing to a close, even some of the Fed's toughest critics are nervous. QE2 was designed to keep bond prices high and interest rates low. It is credited with propping up the economy a bit and, in turn, boosting the stock market. Technically, the Fed is in the midst of its second round of bond buying—hence the 2 in QE2 —since the financial crisis struck in 2008. When the first round ended in spring 2010, both stocks and bonds tumbled.

Now that QE2 is scheduled to cease at the end of June, financial analysts are predicting that the demand for bonds and mortgage-backed securities will fall, which could result in higher rates. This is because there won’t be any bulk buyers of bonds after the Feds stop buying them. Others are speculating that if the prices of oil, gasoline and food continue to remain high, the economy may slow down even further, which may cause the mortgage rates to decline even further. While there are no clear answers, the best thing to do is stay tuned.