Homebuyers – and wannabe homebuyers – rejoice! The predicted rise in interest rates has not come to pass – at least not yet.
Defying the analysis of most experts that expected a slow rise throughout 2014, rates on the 30-year fixed mortgage rate are averaging around 4.2% in early May, a significant decrease from the 4.55% at the beginning of the year.
The Federal Reserve has continued with the tapering of their bond-buying stimulus – the monthly buyback is down to $45 billion, with $20 billion of that purchase in mortgage-backed securities. Logically, bond interest rates should rise and mortgage interest rates should follow, but this is not occurring today.
What happened to throw off the experts? Here are a few possibilities:
- Alternate Bond Demand – Most predictions have been based mostly on the actions of the Fed. However, the Fed is not the only buyer of bonds. Collective demand in bonds has increased, causing the 10-year Treasury yield to drop to 2.6% from the 3.0% yield at the end of 2013.
What is driving demand? According to several analysts, it is the potential for global instability. With increased collective risk in emerging markets, a greater share of global capital is flowing into the relatively safer haven of U.S. bonds.
Certainly, the conflict in Ukraine and the potential for a wider conflict or unpredictable sanctions is not helping – but there are multiple hotspots throughout the emerging markets, and if this is the driving force, should we expect it to change anytime soon?
- Tighter Liquidity – Are Fed actions the cause after all? A February 2014 article in Forbes suggested that the capital brought into the market through the Fed's actions was directed disproportionately to emerging markets. Continued reduction in Fed stimulus means less money is available to emerging markets, creating currency problems and economic slowdowns that accelerate the flight from these markets and into bonds.
If true, that suggests the trend will continue for a while. The Fed shows no signs of changing course until the stimulus ends, presumably in Q3 of 2014.
- Bank Competition – The combination of new qualified mortgage rules forcing greater scrutiny on new loans, the drying up of the more lucrative refinancing market and spectacularly unpleasant weather this winter has left banks in a bind. With a depressed home buying market, banks have been forced to compete more aggressively.
Banks have begun lowering their interest rates and loosening their standards to the extent that they can to entice homebuyers. This seems to be working, as the combination of lower rates and standards changes are causing a small revival in refinances.
Analysts appear to be sticking with the expectation of slow mortgage rate growth, just pushing the growth back for a few months. Economists with Moody's and Freddie Mac both suggest that 5% mortgage rates are likely by the summer of 2015, which should be the current rate based on previous predictions. Higher bond demand is believed to be temporary, and traditional market forces should prevail later in the year.
For this to be true, this implies that global instability will not increase and drive even more capital out of emerging markets and into bonds – or that the faint-hearted have already left and those who remain in are there for good, attracted by higher potential returns.
Other factors may still arise with either the housing or the bond markets that negate these predictions. The safe bet is that interest rates will eventually rise. If you are in the market for a home or a refinance, take advantage of the low rates now. Your luck will run out eventually – even if nobody can tell you when.