Don't expect recent drops in mortgage interest rates to signal a trend toward lower, or even flat rates.
The direction for mortgage rates is most assuredly up, says Fannie Mae's July 2013 Economic Outlook, and Fannie is keeping close tabs on how higher rates are impacting the housing market.
The average 30-year fixed-rate mortgage (FRM) dropped from 4.51 percent, the week ending July 11, to 4.37 percent the week ending July 18, per Freddie Mac’s weekly Primary Mortgage Market Survey. They were down again July 25, to 4.31 percent as all benchmark rates - fixed and adjustable - also fell.
Why Rates Fell
Before we look at why rates fell, we have to examine why they rose in the first place. Rates spiked very quickly (the 30-year fixed mortgage rate increased more than 110 basis points from 3.35 percent during the first week of May to 4.46 percent by the end of June according to Freddie Mac) after Fed Chairman Ben Bernanke remarked that eventually, once the economy was back on its feet, the government would slow down its bond purchases. This program, known as Quantitative Easing, was designed to keep interest rates low, but it would be damaging to continue it indefinitely once the economy heats up. Wall Street got its panic on, traders ran screaming from the bond market and mortgage rates spiked.
On Bernanke's second day of testimony before the House Financial Services Committee Congress on July 17, he indicated that the Fed has no plans to immediately suspend bond purchases or even slow down until unemployment has improved substantially, something many analysts don't foresee happening until 2015. Mr. Bernanke said, "With unemployment still high and declining only gradually, and with inflation running below the Committee's longer-run objective, a highly accommodative monetary policy will remain appropriate for the foreseeable future." In case that wasn't enough to calm down the Chicken Littles on Wall Street, he added, "We intend to continue our purchases until a substantial improvement in the labor market outlook has been realized."
Following this testimony, cooler heads prevailed, and mortgage rates fell back.
What Goes Down Must Come Up
Still, Fannie Mae anticipates that 30-year mortgage rates will average 4.7 percent by the fourth quarter of 2013. "Consumers may recognize that today’s still favorable mortgage rates and homeownership affordability levels will recede over time, said Doug Duncan, SVP and chief economist at Fannie Mae.
Even with interest rates expected to rise near five percent, Fannie's forecast for home sales and home prices has improved slightly. "Given rising home and rental price expectations and improving personal financial attitudes, more prospective homebuyers may be deciding that now is the time to get off the fence," Duncan added.
According to Fannie Mae, home sale volume is on target to increase by eight percent by year end, but the latter half of the year will see less activity than the first half. In addition, Fannie revised its fourth quarter 2013 forecast of housing prices to a median $276,000 for new homes (up from $266,000 in June) and $189,000 for existing homes.
All indications point to housing becoming more expensive in the future, so people considering buying a home would be wise to take action sooner rather than later.