Despite the fact that mortgage rates are already in record territory, the Fed doesn’t seem to be satisfied just yet.
The Federal Reserve has played a part in pushing mortgage rates lower via a strategy known as “Operation Twist,” which is the method in which they replace their short-term debt holdings with long-term debt.
That pushes associated yields lower, and mortgage rates generally follow suit.
But that program is slated to end this month, and with a gloomy outlook for both the U.S. and world economy, a rise in rates wouldn’t be good for an already fragile situation.
Now, it looks as if the Fed may purchase mortgage securities to push rates even lower, or at least keep them low for an extended period of time.
Last week, Treasury yields hit record lows after weak employment data was released. Just 69,000 jobs were added in May, which was lower than expected and the fewest added in a year.
While that alone pushed mortgage rates into record-low territory, it seems as if the Fed wants to keep the downward pressure on for a lot longer.
Mortgage Rates Will Remain Low in 2012
It’s unclear if the move will push rates much lower, or simply keep them at bay. Either way, current rates are savings existing homeowners who can refinance a ton of money.
And they’re making home buying a lot more attractive for prospective buyers, even if there’s downward pressure on home prices.
The Mortgage Bankers Association expects mortgage rates to stay low throughout 2012, and upped their refinance volume estimates by nearly $200 billion as a result.
The group sees refinance volume of $870 billion this year, and purchase-money volume of $409 billion.
They actually cut purchase volume from $415 billion, citing lower than expected home prices and weaker home sales data.
Freddie Mac currently estimates that the 30-year fixed will average 3.9% in the present quarter, 4% in the third quarter, and 4.2% in the fourth quarter.
Rates are expected to slowly tick up to 4.8% by the end of 2013, though that can all change as the Fed adjusts its monetary policy.
Lower Rates Mean Less Upside
There are a few takeaways here. The first is that mortgage rates aren’t expected to rise significantly anytime soon. So there’s no need to panic.
And if anything, they could actually fall further, with the 30-year testing the 3.5% barrier, especially if more bad economic news comes through the door, which it probably will.
At the same time, with mortgage rates already so low, there is limited upside (aka downside). Every time rates fall, the amount they can fall further diminishes.
For example, from the beginning of the year until now, rates on the popular 30-year mortgage have only fallen from 3.91% to 3.75%, per Freddie Mac data. That’s a measly 16 basis points.
But if you look at 2011, the average rate dropped from 4.77% in January to 3.95% in December.
So there’s just less room for rates to fall. Of course, if the 30-year somehow falls into the 2% range, I’ll eat my hat.
Read more: What mortgage rate can I expect to receive?