The average US rates on fixed mortgages recently fell steeply and moved closer to historic lows, a shift favored by many in the mortgage marketplace. Freddie Mac, one of the country’s largest mortgage buyers, announced Thursday, April 11th, 2013, that the average rate for the 30-year fixed loan fell to 3.43 percent from 3.54 percent the previous week. These figures are very close to the 3.31 percent that was reached in November 2012, which also represented the lowest percentage recorded since 1971. The average rate on the 15-year fixed mortgage also dipped to 2.65 percent from 2.74 percent the previous week with figures only slightly above the record low of 2.63 percent in 1971.
These low mortgage rates are helping to sustain the housing recovery that began early last year in 2012. Although mortgage rates have decreased, home sales and construction for residential properties continue to increase significantly and price increases are even higher at a time when more Americans are starting to refinance. Mortgage rates have been slow to increase primarily because they tend to track the yield on the 10-year Treasury note. The yield on the 10-year Treasury note fell in recent weeks to a low of 1.71 percent on April 5th. The revaluing is partly in response to initial March reports on hiring and employment which caused investors to become alarmed and seek the safety of the US treasury bonds. As demand rises the yield falls, rates are also dipping in response.
On the previous Thursday, the yield was rose to 1.71 percent, which is still considered low by historical standards. In order to calculate the average mortgage rates, Freddie Mac surveys lenders across the country between Monday and Wednesday every week. Although the average does not include extra fees, which are also known as points, which the majority of borrowers are required to pay in order to get the lowest rates possible. One point equals one percent of the total loan amount. The average rate on a one-year adjustable rate mortgage reduced to 2.62 percent, down from 2.63 percent the week before. The fee for one year adjustable rate loans also declined to 2.65 percent and the fee held at 0.5 point.
Helping the Economy
According to a CNN Money report, “With economic prospects improving, rates could rise even higher this year. This increase could mathematically make buying a home more expensive, but it's unlikely to stall the housing recovery.” Because the Federal Reserve has made a commitment to keep interest rates low, “more demand for treasuries fueled by a Fed bond-buying program drives yields on those bonds lower.” This means that if you are someone on the market and looking to buy a home, low mortgage rates open up the opportunity to afford higher priced properties. Home buyers are able to afford about one-fifth (or 20 percent) more expensive properties now as opposed to their outlook when rates remained at 4-5 percent.
In terms of economic prospects, the data have several effects:
- Value. Buying a more expensive property will be more appreciate more value when the economy and housing market fully rebounds. All metrics point to this happening sometime over the next 4-5 years.
- Gross Domestic Product. As the housing market rebounds, more people are attempting to save and invest in real estate, fueling the housing market and increasing productivity across many sectors. This has inevitable economic consequences—either in terms of GDP growth or simply slower GDP loss.
- Growth in additional sectors. As prices increase for homes, renting sectors should feel some growth and revitalized interest from people looking for residency while waiting to buy property. This moves more capital around month-to-month, spurring economic activity outside of the home owning and mortgaging industries, and thus fueling other parts of the general economy.
With steadily low mortgage rates bolstering the housing and lending complex of the US economy, investors should expect a full rebound to occur sometime within the next 10 years. Given the US does not fall into yet another recession or financial crisis, industries with substantial finances tied to 10-year government treasury bonds can expect to gain momentum and pick up speed to pre-2007 levels. Until the housing market rebounds however, investors are scooping up discounted real estate and rental properties with the prospect that their assets will increase in value once the US economy has fully recovered from recession.
Angie Picardo is a writer at NerdWallet, a site with a mission to increase financial literacy on topics ranging from mortgage eligibility to selecting New Orleans Airport Parking.