Mortgage Rates Sink to New Record Lows

The Federal Reserve's bond-buying program has helped push rates to at least a 60-year low.

By + More

Mortgage rates are falling again, this time touching new all-time lows on weakening economic indicators and news that the Federal Reserve will buy billions of dollars in mortgage-backed securities until the labor market improves.

Rates for 30-year fixed-rate mortgages sank to an average of 3.36 percent this week according to Freddie Mac's Primary Mortgage Market Survey. That's down from an already rock-bottom average of 3.4 percent last week and more than 0.5 percent lower from a year ago.

[READ: Most Swing States Post Home Price Increases]

Interest rates for shorter term loans fell as well, with average rates for 15-year fixed-rate mortgages well below 3 percent at 2.69 percent. A year ago, rates were around 3.26 percent.

Last month, the Fed committed to buying an additional $40 billion per month in mortgage-backed securities, underscoring its intention to keep interest rates low through mid-2015 to stimulate borrowing and more economic activity.

[READ: Can the Fed Unprint Money?]

"When you have a really big buyer—such as the Fed—enter the market, this will increase demand for mortgage-backed securities. Think back to simple economic principles of supply and demand," says Frank Nothaft, vice president and chief economist at Freddie Mac. "More demand pushes up the price of these securities and with fixed-income securities such as mortgage-backed securities or Treasuries, when the price goes up, the yield goes down."

Yields more or less correlate with interest rates and by pushing rates lower, the Fed hopes to drum up lending and borrowing in the economy—especially in the housing market. The housing market, which has been a net drag during the nation's very tepid economic recovery, is just beginning to find its feet and economists have high hopes for the sector's ability to help improve America's fiscal situation.

"The Fed wants to stimulate housing demand because during the recovery—and we're three years into the recovery now—the housing market has been the laggard," Nothaft says. "That is so different from each and every recovery we've had in the post-WWII period. Everything is backwards."

In some ways, strength in the housing market is already starting to materialize. While some economists are still hesitant to announce that real estate is back, a handful of indicators, especially in the new home sector look encouraging.

[LIVE BLOG: Check out a run-down of Wednesday night's presidential debate.]

Housing starts were up more than 30 percent from a year ago in August, meaning builders are seeing demand from would-be buyers and breaking ground on more new homes. Although economists note the strong numbers are coming up off of abysmal lows, improvement in the decimated construction sector is a key to recovery not only in the housing market but in the broader economy, primarily because construction is a key job creator.

Most economists don't think construction employment will ever return to the dizzying heights of the early 2000s, but more demand for housing will likely put more Americans back to work in various capacities related to the housing market.

"It's at least a 60-year low in mortgage rates," Nothaft says. "That's translated into more housing demand and that's one reason the Fed has been so aggressive in focusing on mortgage rates."

  • Low Rates Fuel Refi Activity, But Will New Mortgage Applications Suffer?
  • The Most Commonly Overlooked Tax Deductions
  • Pace of New Home Building Surges to 2-Year High
  • Meg Handley is a reporter for U.S. News & World Report. You can  follow her on Twitter or reach her at mhandley@usnews.com.