So far, 2013 has been an up-and-down year for mortgage rates. After cresting in March, rates for average for 30-year conforming fixed-rate mortgages have sunk by about a quarter percentage point, currently just above the low point for this year.
While the move between recent peaks and valleys may be more psychological than anything else – the change translates to only about $12.50 per month for a $100,000 30-year fixed-rate mortgage – mortgage rates, even at their yearly high, remain at historically low levels.
Here's a look at the factors helping to keep a lid on mortgage rates:
The Federal Reserve: Arguably the most influential factor at the moment, the Fed has been instrumental in keeping downward pressure on interest rates. Purchasing up to $45 billion in Treasury bills per month, along with $40 billion in mortgage-backed securities per month, will allow the central bank to manipulate interest rates for some time to come. How long the Fed will massage mortgage rates is an open question, with some members pushing to reduce this support as early as this summer.
U.S. economy: Whether strong or weak, the economy's influence over mortgage rates is powerful and constant. A strong economy produces widespread demand for mortgage credit and may create inflation, while a weak economy does the opposite. The Fed's current programs are an attempt to spur economic growth and even create a little inflation. To the extent that the Fed succeeds and the economy improves, the result will ultimately be higher interest rates. For the moment, the struggling economy is prompting investors to head for the safety of government-backed debt, pushing Treasury yields down and dragging mortgage rates right along.
Foreign concerns: Concerns of all stripes overseas have been another factor keeping U.S. interest rates low. Investors around the world have expressed concern over political issues in North Korea and Syria and financial issues in the Eurozone by stashing their money in the safest place they can find, usually U.S.-backed Treasury debt. Again, this serves to push yields down further than they would otherwise be.
Demand: Mortgage rates also tend to ease when demand tapers off, often the consumer reaction to higher interest rates. Less demand loosens up the mortgage pipeline to a degree, and lenders may need to price loans somewhat more aggressively in order to attract more business. A steady period of rising rates may be followed by a period of more aggressively priced loans, which in turn can help keep mortgage rates from rising as much as they otherwise would, at least for a time.
Inflation: Inflation affects interest rates on mortgages, treasuries and other fixed-income investments by cutting into investor returns. Thus, when inflation is high, lenders must raise rates in order to keep their profit margins in line. The current lack of inflation concerns has helped to keep mortgage rates from rising more than they otherwise would, and more importantly, helps provide them with more room to fall.
These lids won't stay sealed forever. Should the fiscal or political climate improve, money would tend to move out of these safe-havens in search of greater returns, but to the benefit of mortgage borrowers, the world remains unsteady in the meantime.
Tim Manni is the Managing Editor for HSH.com, and is also one of the authors of their daily blog, which concentrates on the latest developments in the mortgage and housing markets. Tim's work with HSH.com has been featured in several other media outlets, including the Wall Street Journal, MSN Real Estate, Forbes and MarketWatch.com.