Low Interest Rates: No Need to Rush

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Everyone knows interest rates are going up ... eventually. But so far this year they've stayed much lower, much longer than experts predicted.

Average interest rates for 30-year home loans slid to 5.06 percent (plus 0.7 percent in fees) for the week ending April 29. That's down from 5.07 percent the week before. Interest rates have been a hair above 5 percent for the last three weeks, according to Freddie Mac's Primary Mortgage Market Survey.

But rates were supposed to be racing upward. A year ago, Freddie Mac predicted rates would average 5.5 percent this quarter. Freddie Mac has already revised its prediction down to 5.3 percent.

So what's going on?
Economists were encouraged to see interest rates stay close to 5 percent even after the government stopped part of its massive effort to encourage borrowing and lending. The Federal Reserve and the Treasury had purchased more than $1.25 trillion in bonds backed by home loans during the financial crisis. The government stopped buying these bonds in March.

Experts predicted an "orderly" end to the program, but so far it's gone even more smoothly than expected. Private investors have pumped cash into the mortgage market fast enough to replace the federal dollars no longer flowing. That's kept the prices of housing bonds relatively high -- which is one of the reasons that the federal government is losing less cash than anticipated overall from the bailouts, as it prepares to sell its more than $1 trillion in bonds at a gain.

The cash from private bond-buyers has also kept interest rates low, since interest rates drop as investors bid bond prices higher.

Interest rates are also low because the Federal Reserve's most important benchmark interest rates are still set at effectively zero.

In the past, officials have kept these rates at 2 percent or above. Officials usually raise the rates to slow down an overheated economy and fight inflation -- that's not our problem yet. But eventually the Fed rates will rise, and the increase will probably be added to interest rates throughout the capital markets.

Of course, low rates can't last forever: Interest rates today are now, on average, a full half a percentage point below the supposedly rate-bottom interest rates that helped inflate the housing bubble. During the boom, rates averaged close to 6 percent: 5.8 percent in 2003 and 2004, and 5.9 percent in 2005, according to Freddie Mac.

Freddie's economists still think average rates will hit 6 percent by the end of the year. So while it's hard to know what a normal interest rate will look like once the economy recovers, it is likely to be above 6 percent.
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