The proverbial proof is in the pudding – contrary to most analyst forecasts that mortgage interest rates would breach the 5 percent mark by the end of calendar 2014, rates had instead taken a divergent path. While Freddie Mac’s most recent mortgage rate survey shows 30-year fixed-rate products higher at 3.69 percent (up from 3.59 percent the past week), these rates remain far lower than last year’s data. The interest rate on 15-year fixed rate loans is also substantially lower than is was a year ago, currently hovering at 2.99 percent, down from the year-ago figure of 3.33 percent.
Taking stock of the current mortgage market climate, the Urban Institute released an interesting report this week, thoroughly analyzing the market and isolating the five variables that have been most responsible for bringing mortgage rates down over the past few months. While some of the variables are familiar, even to casual market observers, Urban Institute’s incisive analysis makes its report a must-read for anyone who fancies themselves a mortgage market prognosticator.
The first variable, mentioned, was slow domestic growth and global economic uncertainty, as investors have been pushing Treasury rates down as they seek safe haven in the U.S. The unwieldy state of the broader Eurozone economy has been one sub-variable consistently driving mortgage rates down, though on Zillow’s most recent Zillow Mortgages report, the company’s vice president of mortgages Erin Lantz opined that the extremely upbeat January employment report had countered all “potential headwinds from continued turmoil in Europe.”
The current state of the oil market was the second variable cited by The Urban Institute. “The rapid drop in oil prices is generally good news for American consumers (if less positive for American oil producers),” suggested the report, “but it also signals a degree of uncertainty in the commodity markets.” Oil had long gone below the $50 per barrel mark, and while prices seem to be stabilizing a bit, the fact remains that oil prices are still much lower than they were in the summer of 2014.
What was more interesting than this was the third variable mentioned – steady improvements in the U.S. economy. According to Urban Institute, the “uncertainty premium” that usually predicates higher interest rates has become much smaller than it was one year ago.
On a more basic, common-sense level, low Treasury rates have led to low mortgage rates, making this the fourth force keeping mortgage rates down. Currently, 10-year Treasuries have a yield rate of 1.88 percent, which is a historically-low level. “The strength of the U.S. economy, at least for this week, was enough to overshadow the concerns about slower growth in both developed and emerging markets around the globe,” wrote Bankrate in a separate report. “The prospects for higher rates sapped some of the demand for bonds, with both government bond yields and mortgage rates moving higher in response.”
The last variable mentioned by the Urban Institute was a reduced demand for mortgage products. According to the organization, higher credit restrictions were just among the many reasons why demand was down, but mortgage premiums may likely be lower, provided if the blend of originated mortgages is not as risky as it was in the run-up to the housing crisis. “Generally increasing housing values should also reduce the risk premium,” the Institute added.
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