At the start of 2014, most industry experts and insiders agreed that based on the metrics they had at the time, interest rates and therefore mortgage rates would be going up in 2014.
And yet now five months into the year, mortgage rates continue to defy analyst expectations.
At the start of the year, the Mortgage Bankers Association projected interest rates on the 10-year Treasury yield to go from 3% in the first quarter of 2014 to 3.3% by fourth quarter of 2014, averaging 3.2% for the year, and then creeping up to 3.5% by the last two quarters 2015, averaging 3.4% for 2015.
MBA projected that 30-year fixed mortgage rates will go from 4.7% in the first quarter 2014 to 5.1% by the end of the year, and continuing a slow rise to 5.3% by the end of 2015.
Last week, Freddie Mac reported that mortgage rates dropped for the fourth time in five weeks, reaching an all-time low of 4.21% on a 30-year fixed, the lowest its been since November 2013. This is from the high point in January where rates flirted with 4.75%.
This is a boon for homebuyers, but what does it mean for the industry, and where will interest rates go?
1) You Can’t Fake a Recovery
Everyone likes positive spin, but no amount of Pollyanna press releases can change the fundamentals.
Job growth continues to disappoint, affordability remains an issue, and sales of almost all single-family home types are weak. Mortgage applications are slow. Wage stagnation remain challenges for both housing and for the economy in general.
Because of this, mortgage bonds in demand, which helps to move mortgage rates lower.
2) Lack of Inflation
Rising inflation deflates the demand for mortgage bonds. Prices drop and rates move higher. But since there’s been almost no inflation, demand for bonds means mortgage rates sink.
3) The Taper Will Continue Until Morale Improves
Fed Chair Janet Yellen is committed to the taper. Unwinding the Federal Reserve from buying tens of billions of Treasurys and bonds every month continues apace.
Just last week Yellen told both houses of Congress that the central bank will continue the tapering, with the end of quantitative easing by the fall of 2014, barring any wild changes.