Mortgage Rates May Fall Even Lower

How low can mortgage rates go?

It seems like mortgage interest rates keep falling to new lows, largely thanks to a struggling economy.

The 30-year fixed-rate mortgage fell to 3.56 percent with an average point of 0.7 for the week ending July 12, down from 3.62 percent the previous week, according to Freddie Mac. At the same time, the 15-year fixed-rate mortgage dropped to 2.86 percent with an average 0.7 point, down from 2.89 percent from the previous week. This time last year, the 30-year fixed-rate mortgage averaged 4.51 percent, and the 15-year was at 3.65 percent.

A poor jobs report for June helped decrease long-term Treasury bond yields and mortgage rates. Only 80,000 jobs were created, not enough to make a dent in the 8.2 percent unemployment rate.

Homebuyers and current homeowners, as well as mortgage professionals, are probably wondering if rates can drop even more. Homeowners may be wondering if they should put off their mortgage refinance in a bid to lock into an even lower interest rate.

Wait for Lower Rates?

Home buyers might be thinking about delaying a home purchase for another year a few more months to wait for a better rate. Perhaps they think home prices will go down even more, and they figure they’ll be able to buy a larger, better house if interest rates decline a bit more.

Here are some reasons why mortgage rates could drop even more.

Bond spreads. Mortgage rates are higher than usual when compared to Treasury bonds.

Mortgage rates, typically based on Treasury bond yields, are usually about a 1.7 percentage point higher than the 10-yield Treasury bond yield. But recently the difference between mortgage rates and those bond yields, or the spread, been has more than 2 percentage points higher.

The euro zone. The ongoing euro zone debacle, which shows no signs of ending, could prompt investors to put even more of their money into Treasuries. That would drive both Treasury yields and mortgage rates even lower. European leaders appear to be dedicated to austerity measures that have proven to be a failure.

Drastically slashing public spending and raising taxes in an effort to decrease countries’ debt have decreased government revenues and worsened recessions. Recession in Europe will probably be a drag on the U.S. economy, as Europeans will have less money to buy American goods.

Plus, financial markets will probably continue to fear that break up of the euro zone will create a financial crisis that spreads to this country. Many European banks are highly interconnected with the U.S. financial system, and our fragile economy remains vulnerable in this integrated financial landscape.

Quantitative easing. The Federal Reserve might pursue another round of quantitative easing, a so-called QE 3, in which it purchases large amounts of bonds in an effort to drive down interest rates. Although only a few Fed board members now advocate more easing, other members say they will support it if economic conditions worsen.

The Fed has already extended its Operation Twist – selling short-term bonds and buying long-term bonds in an effort to drive down long-term interest rates – through the end of the year.

China. A slowing Chinese economy could export more economic troubles. The signs of an approaching economic meltdown are clear, notes an article in the journal, Foreign Policy. Chinese businesses are obtaining fewer loans. Interest rates have been cut. Manufacturing output has tanked. Imports are flat, and GDP growth projections are down. Real-world signs, like fire sales of government property, falling pork prices, and wealthy Chinese moving their money overseas, and incidents of social unrest, are evidence of a faltering economy.

Consumers Benefiting from Low Interest Rates

While low home loan rates show the feebleness of the global economic recovery, homeowners benefit by being able to refinance at much lower rates. If home loan rates are not at record lows, they’ll probably stay pretty close. The average 30-year fixed has stayed below 4 percent for 16 weeks, while the average 15-year fixed has remained under 3 percent for seven weeks, according to Freddie Mac.

But then again, anything is possible. It’s possible that the world economy will unexpectedly rebound and euro zone leaders will suddenly agree on a comprehensive solution to their fiscal crisis. Instead of waiting for mortgage rates to drop even more, home buyers and homeowners should lock into a low mortgage rate when it’s in their best financial interest.