Why Did Mortgage Rates Hit a Record Low This Week?


Yesterday, 30-year fixed mortgage rates hit record low of 4.69%. What's going on in the macroeconomic landscape that's causing these rates to dip to this level? I spoke to Michael Fratantoni, Vice President of Research and Economics at the Mortgage Bankers Association for some insights. He said there were three main causes: Europe's instability, the government sponsored entity repurchases, and weak consumer demand for new mortgages.

Europe's Woes Are U.S. Mortgage Rates' Delight

Several nations in Europe have been encountering sovereign debt problems lately. That's made global investors nervous, and created a flight to quality -- to U.S. debt. As a result, Treasury rates have declined significantly over the past few months. Since 30-year mortgage rates tend to trend in the same direction as 10-year Treasury bond rates, they have fallen as well. Here's how those 10-year Treasury bond rates have changed over the course of 2010:

10-Year Treasury 2010-06.PNG

The GSEs Buy Up Bad Mortgages

Back in February, GSEs Fannie Mae and Freddie Mac announced that they would be purchasing $200 billion in delinquent mortgages that they had guaranteed. This created a big demand shock over the past few months. Through April, however, moderate new mortgage activity conjured up through the home buyer credit was creating additional supply to at least partially keep up with this demand. In May, however, that changed.

Weak Consumer Demand for New Mortgages

Now, the supply story is different. Mortgage applications have sunk, particularly for new purchases which are at 1997 lows. All those global investors who want to buy Agency bonds from Fannie and Freddie are competing for a limited amount of new issuance, due to lackluster consumer demand for mortgages. With so little new supply, investor demand is pushing rates downward.

What's Not Causing the Drop: The Fed

So how has the grand master of interest rates, the Federal Reserve, contributed to the fall in mortgage rates? Very little actually. It only has direct control over short-term rates these days, not rates of loans with longer maturities like 30-year mortgages. At most, its effect is indirect. It ended its mortgage-backed security buying program in March and has been allowing its pool of assets to gradually pay off without reinvesting in additional mortgages.

Could Rates Go Even Lower?

Of course, the logical question you might wonder is: can rates go even lower? While that's possible, Fratantoni doesn't see them dipping much further. He says:

Our baseline expectation is for continued economic growth, although not terribly robust. With that, some positive job growth and a very, very slow decline in the unemployment rate. With that as the macroeconomic backdrop, we expect that rates are going to start heading upwards.

He expects the 30-year fixed mortgage rate to end the year at around 5.5%. Of course, if there is a double-dip in the economy or housing market, then rates could stay very low, or even decline further.

Jump to comments
Presented by

Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.
Get Today's Top Stories in Your Inbox (preview)

What's the Number One Thing We Could Do to Improve City Life?

A group of journalists, professors, and non-profit leaders predict the future of livable, walkable cities

Elsewhere on the web

Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register. blog comments powered by Disqus


Adventures in Legal Weed

Colorado is now well into its first year as the first state to legalize recreational marijuana. How's it going? James Hamblin visits Aspen.


What Makes a Story Great?

The storytellers behind House of CardsandThis American Life reflect on the creative process.


Tracing Sriracha's Origin to Thailand

Ever wonder how the wildly popular hot sauce got its name? It all started in Si Racha.


Where Confiscated Wildlife Ends Up

A government facility outside of Denver houses more than a million products of the illegal wildlife trade, from tigers and bears to bald eagles.


Is Wine Healthy?

James Hamblin prepares to impress his date with knowledge about the health benefits of wine.


The World's Largest Balloon Festival

Nine days, more than 700 balloons, and a whole lot of hot air



More in Business

Just In