"Mortgage rates are at an all-time low!"
For 11 months, conforming and FHA mortgage rates have been in steady decline. It has fanned a refinance boom that has lasted almost a year, and the cost of homeownership is now at levels not seen in 70 years.
Just when we think mortgage rates can't fall any farther, they do, time and again.
Whether you're looking at a conforming home loan, an FHA Streamline Refinance, VA financing, or HARP 2.0, if you can understand why mortgage rates are this low, you'll be better suited to fully realize that these record-low mortgage rates can't last forever. The sooner you act the better shot you'll have at locking in one of the lowest mortgage rates in our nation's housing history.
4 reasons why mortgage rates keep falling
There's no one factor that has put the 30-year fixed rate mortgage on a 4-percent trajectory. There's a host of factors and each has played an important part. Let's examine a four of them:
1. Sovereign debt concerns: It's a lingering story, one that lays the groundwork for everything that's followed. In early 2010, it was revealed that Greece had been spending well beyond its means and had amassed one of the world's largest deficits relative to its gross domestic product (GDP).
Investors feared that the nation-state would be unable to repay creditors -- a class that includes many of Europe's largest banks. To avoid that scenario, other European nations and the International Monetary Fund extended a €110 billion loan to Greece in May 2010 with the stipulation that Greece cut its spending.
Greece has tried to cut spending, but nearly two years later, its spending as a percentage of its GDP has grown. Investors have remained fearful that the problems in Greece will eventually harm Euro-based banks, which will have negative consequences for other Eurozone nations and the global economy.
This concern is driving mortgage rates lower. Investors have reduced their collective exposure to the risk of the Eurozone, parking their monies in the relative safety of U.S. government-backed mortgage bonds. This pattern is known as "safe haven" buying. It's by far the biggest force that's holding mortgage rates low.
So long as Greece (and the Eurozone) is unresolved on sovereign debt, U.S. mortgage rates will remain low.
2. Economic uncertainty: "Safe haven" buying extends beyond just sovereign debt concerns. It's a common fall-back strategy for investors facing uncertainty. When market risks are high, investors seek safety of capital. The government-backed bond market fulfills that role.
Since 2009, a combination of job loss, housing doldrums and a weakness in manufacturing has held the U.S. economy in check. The nation survived a recession and its recovery -- although slow -- has been constant. The economy has added jobs for 14 straight months, housing appears to have bottomed in many U.S. markets, and factories are getting closer to capacity.
The weak conditions that drive investors into bonds are subsiding. Soon, an appetite for risk will return. When it does, safe haven buying patterns will reverse and mortgage rates will rise.
3. Federal Reserve asset purchase programs: This story, too, has a history. In successive years since 2009, the Federal Reserve has conducted open market operations focused on government-backed bonds, including Treasuries and mortgage-backed securities. In 2009, a mortgage purchase program totaled $1.25 trillion. In 2010, "QE2" brought in $600 billion, and "Operation Twist" totaled $400 billion in 2011.
With each new Fed program, the demand for mortgage bonds spike, and when demand for mortgage bonds is high, bonds prices rise, driving mortgage rates lower.
The Federal Reserve's programs have played a large role in keeping mortgage rates so low. That said, those programs are expected to end in 2012 as the economy returns to solid footing.
4. Low inflation: Inflation is the enemy of mortgage rates. When inflation is present, all things equal, mortgage rates rise. This is because inflation is, quite literally, the devaluation of the U.S. dollar and everything denominated in U.S. dollars -- including mortgage-backed bonds.
When investors buy mortgage-backed bonds, they receive a stream of payments over time from the bond issuer. However, when inflation is present, that payment stream has less value. This is why rising inflation links to rising mortgage rates. Investors don't want to hold an asset that pays less over time. Demand falls in the face of inflation, pushing down prices and causing mortgage rates to rise.
Inflation has been exceeding low since 2010, bordering on deflation. But this is expected to reverse in 2012. The Fed's stimulus policies are expected to combine with economic growth to put inflation-control back on the front burner.
Mortgage rates can't stay low much longer
There are a lot of forces that conspired to keep mortgage rates low in 2011 and some of that energy spilled into 2012. However, if we examine the factors one-by-one, mortgage rates look poised to jump. And this won't be a gradual jump, but all at once.
Today's low mortgage rates are a gift. Don't think too long on them -- you may miss out for good.
Dan Green is a loan officer with Waterstone Mortgage in Cincinnati, Ohio, and the author of the nationally recognized mortgage blog, TheMortgageReports.com. As well as serving the purchase and refinance needs of his clients, Dan speaks to national audiences about mortgage rates and the mortgage market. Follow him on Twitter at@mortgagereports.
