Mortgage Rates Remain Low, But for How Long?

After a brief spike, mortgage rates continued their downward march this week, touching new lows. According to the most recent Freddie Mac Primary Mortgage Market Survey (PMMS), the 30-year fixed rate is now at 4.17%, while the average 15-year rate is 3.57%. These are the lowest rates on record, not to mention that the 30-year fixed rate has now been under 5% for an unprecedented five months.

It was initially unclear how the just-announced resumption of purchases of government bonds by the Federal Reserve Bank would affect mortgage rates. Some analysts argued that it had already been priced into mortgage rates and hence would have no impact. Given the size of the program (0 Billion), however, as well as the intentions of the Fed, this seems inconceivable. In a recent Washington Post editorial, Fed Chairman Ben Bernanke wrote, “Lower mortgage rates will make housing more affordable and allow more homeowners to refinance.

At the very least, you would expect rates to decline slightly from present levels, perhaps to below 4%. At this point, it seems most eligible borrowers have either obtained a new mortgage or refinanced their existing mortgage. While a further decline in rates could spur another wave of refinancing activity, it probably won’t bring many additional first-time borrowers into the market.

Going forward, the Mortgage Bankers Association forecasts that “Rates on the 30-year fixed-rate mortgage will average 4.4% in the fourth quarter of 2010, increasing to a 4.7% average in the first quarter of 2011, and climbing to 5.1% by the end of next year.” Given that the group is projecting a decline in mortgage volume in 2011, it’s not clear what would drive this decline. While it seems inevitable that rates will rise at some point, weak housing market fundamentals will ensure that rates nonetheless remain at affordable levels for the foreseeable future.