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.

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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.

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