Why We May Never See 3% Mortgage Rates Again

Before you go, we thought you'd like these...
low mortgage rates economy federal reserve bond buying stimulus
Justin Sullivan/Getty Images
By Les Christie

Say goodbye to ultra-low mortgage rates.

In the past month, rates have been on the rise and they are expected to continue to climb. Last week, the average rate on a 30-year fixed-rate mortgage climbed to 3.81 percent, up from 3.3 percent in early May, according to mortgage giant Freddie Mac. Meanwhile, those seeking a 15-year loan received an average rate of 2.98 percent, up from 2.56 percent a month earlier -- a record low.

"It's unlikely that rates will ever be that low again," said Doug Duncan, Fannie Mae's chief economist.

Those who didn't take advantage of record-low rates have missed the boat -- at least for now. Here are three reasons why.

The Fed is going to stop bolstering the housing market. The Fed has kept rates at rock-bottom levels by buying up to $85 billion a month of Treasury bonds and mortgage-backed securities. That has enabled lenders to sell mortgage loans at low interest rates and recoup their money immediately -- plus profits.
Sponsored Links


"Up until recently, expectations were that the Fed would begin to taper purchases of mortgage-backed securities and Treasury bonds late in 2013, but that timeframe appears to have moved to September, possibly sooner," said Keith Gumbinger, vice president of HSH.com, a mortgage information company.

If the Fed stops purchasing the securities, private investors will have to pick up the slack. For investors to do that, the loans will have offer a better payoff. And that would mean raising rates for borrowers, said Duncan.

The economy is no longer reeling. During the recession, the Fed lowered its short-term interest rate to near zero in order to stimulate the economy. But now conditions have improved considerably since the economy emerged from recession four years ago. As the economic revival gains traction, it is creating a tailwind for interest rate increases, according to Gumbinger.

Low rates happen when the economy is in distress. But now, the market believes the economy is getting stronger, said Wendy Cutrefelli, a vice president in the Mortgage Banking Division of Bank of the West.

Job gains have picked up lately, averaging about 202,000 a month over the past six months.

That hiring is advancing rather than retreating is good news for the economy and any positive future reports are expected to push rates higher, according to Gumbinger. Even mediocre news might not cause any meaningful decline in rates.

3.3 percent rates are unprecedented. "The 30-year [mortgage rate] hit a 37-year low in 2003 at 5.23 percent," said Gumbinger. "That was the previous low-watermark prior to this financial crisis and it's likely we will move closer to that mark as we grind forward."

Any return to normal conditions, therefore, will likely be accompanied by higher mortgage rates.

For clues to the direction of mortgage rates, look at the daily movements in 10-year Treasury bond yields. Mortgage rates track Treasury yields with the difference between them holding fairly constant.

These days, Treasury bonds have been on a jumpy uphill climb, with the 10-year hitting 2.21 percent on May 31, its highest closing since April 2012. On Thursday, the yield was about 2.10 percent. Since the interest rate on a 30-year is usually 1.7 to 2 percentage points higher, it indicates that mortgages should be at between 3.82 percent and 4.12 percent this week.


More from CNNMoney

Why We May Never See 3% Mortgage Rates Again
The gross domestic product measures the level of economic activity within a country. To figure the number, the Bureau of Economic Analysis combines the total consumption of goods and services by private individuals and businesses; the total investment in capital for producing goods and services; the total amount spent and consumed by federal, state, and local government entities; and total net exports. It's important, because it serves as the primary gauge of whether the economy is growing or not. Most economists define a recession as two or more consecutive quarters of shrinking GDP.
The CPI measures current price levels for the goods and services that Americans buy. The Bureau of Labor Statistics collects price data on a basket of different items, ranging from necessities like food, clothing and housing to more discretionary expenses like eating out and entertainment. The resulting figure is then compared to those of previous months to determine the inflation rate, which is used in a variety of ways, including cost-of-living increases for Social Security and other government benefits.
The unemployment rate measures the percentage of workers within the total labor force who don't have a job, but who have looked for work in the past four weeks, and who are available to work. Those temporarily laid off from their jobs are also included as unemployed. Yet as critical as the figure is as a measure of how many people are out of work and therefore suffering financial hardship from a lack of a paycheck, one key item to note about the unemployment rate is that the number does not reflect workers who have stopped looking for work entirely. It's therefore important to look beyond the headline numbers to see whether the overall workforce is growing or shrinking.
The trade deficit measures the difference between the value of a nation's imported and exported goods. When exports exceed imports, a country runs a trade surplus. But in the U.S., imports have exceeded exports consistently for decades. The figure is important as a measure of U.S. competitiveness in the global market, as well as the nation's dependence on foreign countries.
Each month, the Bureau of Economic Analysis measures changes in the total amount of income that the U.S. population earns, as well as the total amount they spend on goods and services. But there's a reason we've combined them on one slide: In addition to being useful statistics separately for gauging Americans' earning power and spending activity, looking at those numbers in combination gives you a sense of how much people are saving for their future.
Consumers play a vital role in powering the overall economy, and so measures of how confident they are about the economy's prospects are important in predicting its future health. The Conference Board does a survey asking consumers to give their assessment of both current and future economic conditions, with questions about business and employment conditions as well as expected future family income.
The health of the housing market is closely tied to the overall direction of the broader economy. The S&P/Case-Shiller Home Price Index, named for economists Karl Case and Robert Shiller, provides a way to measure home prices, allowing comparisons not just across time but also among different markets in cities and regions of the nation. The number is important not just to home builders and home buyers, but to the millions of people with jobs related to housing and construction.
Most economic data provides a backward-looking view of what has already happened to the economy. But the Conference Board's Leading Economic Index attempts to gauge the future. To do so, the index looks at data on employment, manufacturing, home construction, consumer sentiment, and the stock and bond markets to put together a complete picture of expected economic conditions ahead.
of
SEE ALL
BACK TO SLIDE
SHOW CAPTION +
HIDE CAPTION
Read Full Story

People are Reading