Inflation, housing demand and the Syrian opposition all have one thing in common; can you guess what it is?
Mortgage rates for 15- and 30-year mortgage in the first week of May, according to the latest Primary Mortgage Market Survey from Freddie Mac, were just 2.61 and 3.44 percent, respectively. Though those numbers were slightly higher than the week before, they are still more than 10 percent below last year’s already record-setting levels.
Though analysts expect mortgage rates to increase by the end of the year, why are current rates so darn low? Here are three of the more interesting reasons to consider:
1. The Demand Paradox – Only in this housing market would such a situation arise. Mortgage rates typically fall when demand for mortgages is less-than-stellar, and for good reason – banks hope the low rates will attract potential homebuyers to get off the fence, and in any other housing market, our explanation would stop here. Yet, demand for mortgages is at a three-year high, and the housing market is recovering, so what gives?
The answer is actually a simple one – the Federal Reserve, though its quantitative easing and the strangely named “Operation Twist” monetary policies, has unleashed a bazooka of cash into the economy, and with so much cheap money flying around, rates have had nowhere to go but down, regardless of mortgage demand.
2. Low Inflation – Inflation is one of those wonky terms that can quickly grow irritating, but in the case of mortgage rates, it actually makes perfect sense. Rates rise when inflation rises, because when inflation is high, investments (such as mortgages) are not as valuable, so banks increase their rates to cover their profit margins. Currently, though, inflation is all but non-existent, so banks can keep rates low and, in the case of Wells Fargo and JPMorgan Chase, report record profits.
3. Foreign Conflicts – Perhaps the most intriguing cause for today’s record low interest rates is foreign conflicts, particularly the stalemate between the U.S. and North Korea and the civil war in Syria. Though those conflicts could not seem further removed from, say, someone buying a two-bedroom condo in West Town, we’re living in a global economy that ebbs and flows based on international developments, and in countries such as North Korea and Syria, which impact dozens of the world’s most powerful nations, market unrest often leads to lower mortgage rates here at home.