Fourth quarter begins with record-low mortgage ratesby Keith Gumbinger
Below is an excerpt from the latest Market Trends newsletter, available Friday night in your inbox.
Even though some of the economic news was a little warmer last week, mortgage rates continued their downward drive. However, the decline last week was more muted than the previous week, and with the cumulative benefit of the Fed’s QE3 program closing in on a quarter-percentage point, we may not have all that much room for rates to fall at the moment.
Mortgage rates still setting records
HSH.com’s broad-market mortgage tracker–our weekly Fixed-Rate Mortgage Indicator (FRMI)–found that the overall average rate for 30-year fixed-rate mortgages (conforming, non-conforming and jumbos) declined by just two basis points (0.02 percent) to 3.68 percent, a new record low for the series.
The FRMI’s 15-year companion shed three basis points to land at a new record low of an even 3 percent.
FHA-backed 30-year FRMs downshifted by just a single basis point, as the most viable option for credit- or equity-impaired borrowers trickled to a new low of 3.28 percent. Finally, the overall average rate for 5/1 Hybrid ARMs held fast at 2.70 percent for a third consecutive week, remaining at a record low.
Fed minutes discuss QE3 and more
The Federal Reserve released the minutes of the September meeting that resulted in QE3–the new program to push down mortgage rates. In addition to the discussion which led to the new policy, the Fed analyzed the effects of a large-scale asset purchase program. Although no plans were discussed or put in place, this might be a precursor of sorts to a Fed response should economic growth continue be anemic.
In the announcement of the new MBS program, the Fed noted “if the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases…” This meeting may have laid the groundwork for the next move, should it be needed. Most likely, such purchases would be in the form Treasury obligations.
QE3: A two-edged sword, or at least a Catch-22
The Fed wants to see more economic growth, and pushes mortgage rates down to help foster that outcome. If the economy is improving or does start to improve, the Fed will need to do less to achieve its goals, and mortgage rates would tend to rise with the improving climate, which in turn might temper growth.
What’s there to cheer for?
How about broad-based economic gains which take the Fed out of the picture, letting markets again discover the true price of mortgages? Or, root for interest rates to remain at artificially low levels, so that more homeowners can profitably refinance, or to see home prices reflated though the inducement of affordability-driven sales?
At some point, and for some time thereafter, we are likely to see both. How long such conditions–a rising economy with rock-bottom rates–might last is anyone’s guess at this point, and we’ve yet to get there, but it’s never too soon to consider the possibilities. The Fed has pledged to keep its foot on the gas even after the economy gets more fully underway, but when it occurs, it strikes us that it will be a nervous time in the markets, indeed.
Is the decline over?
It would appear that the decline in rates has softened, at least for the moment. When the Fed announced its program, we reckoned it might have a value of a quarter-percentage point on rates given current conditions, and we’ll stand by that assessment for at least the moment. That being the case, and since much of that expected decline is now in place, we’ll call for rates to be about unchanged by the end of the week.