8 Why the Federal Reserve Keeps Mortgage Rates Low
Mortgage interest rates have continued to stay very low in 2016, as the Federal Reserve aims to stimulate the housing market and consumer purchases. In fact, mortgage rates have stayed under 4% for a 30 year fixed mortgage for years. Many people wonder why the Federal Reserve continues to keep interest rates so low, which also keeps mortgage interest rates low.
The biggest reason is that the US economy, seven full years at least after the mortgage meltdown, is still growing only moderately. Even after the Fed printed billions of dollars and injected it into the economy for several years – known as quantitative easing – the economy has stubbornly stayed at an annual GDP growth rate of 2% or so.
So, the Fed has decided to keep interest rates very low for the foreseeable future. While the Federal Reserve did increase rates ¼ of a point or so in late 2015, rates are still being kept low.
Today the fixed rate mortgage for refinancing has fallen back to a near record level. Several recent events in 2016 have encouraged the Fed to keep the cost of borrowing money cheap:
China. This Asia giant has been one of the fastest-growing economies in the world for years, but economic growth has gotten sluggish in recent months. This has made many investors wary about global economic growth. This lower growth in China means the economy there is slowing down, and the Federal Reserve thinks that this could cause the US economy to slow. So, mortgage rates have stayed low.
Oil prices. They have been very low generally for the last year due to oversupply in the world market. The fracking boom in the US also has helped to keep oil prices low. With oil prices at $40 per barrel, many investors would rather buy bonds, which cause mortgage interest rates to fall or stay low.
Low inflation. Inflation rates still have not increased as much as the Fed expected in the last three years. Inflation causes mortgage interest rates to rise, so lack of inflation means low interest rates. When inflation goes up, the value of owning bonds backed by mortgages drops because bond payments have a lower value to the holder. So, bond holders sell, which boosts the market supply, and bond prices drop. This increases mortgage rates. But when inflation drops, the mortgage bond's value goes up, and that makes rates fall for mortgages.
Brexit. The recent, some say unexpected, vote by the UK to leave the EU has played a role. Brexit disturbed financial markets and caused stocks in the US to drop as investors worried about the financial effects of the vote. If equity markets get volatile, investors opt for alternatives they think are safer. Nothing is safer than US Treasury bonds. They are considered some of the safest investments on earth. Their price has gone up and yields have gone down, thus keeping mortgage rates low.
Experts say that mortgage interest rates should continue to stay under 4% for 2016, as GDP came in for the second quarter at only 1.2%. Also, the Fed probably will not want to increase rates in a presidential election year, given the uncertainty about the future leadership of the US.
This makes it a very good time to get into a mortgage. Experts tell us that banks in 2016 are issuing more mortgage loan approvals as they are relaxing lender standards. In fact, a full 13% of banks that were surveyed recently stated that they are easing mortgage loan standards and only 2% said they are tightening them, as of spring 2016.
Further data shows that ¾ of mortgage applications are getting to closing. So if you were turned down for a loan in the recent past, now could be a very good time to reapply.
The Bottom Line
Although the Fed currently wants to keep interest rates low to stimulate economic growth, there is little question that mortgage rates cannot stay this low forever. Eventually, the US economy will get stronger, unemployment will fall, worker participation in the economy will increase, and interest rates will eventually rise. So, enjoy the very low mortgage interest rates now so that you can buy more home for less money – it won't last forever! Article was written by Jenifer Stone