Refinance rates remain low, but for how long

The record low mortgage rates have benefitted home owners who have refinanced and new buyers who have purchased a home this year. Rates, which dropped to historic lows in early 2009, have remained at or below record lows for the better part of the entire year. The question moving forward, is how long will the low rates last, and is there any potential for rates to move lower this year to spur yet another refinance boom, or are the best days behind us heading into the fourth quarter of the year.

The current market has benefitted from government interaction in December of last year and again in March of this year. The governments move to purchase mortgage backed loan securities through the Federal Reserve is strongly linked to the dramatic drop with mortgage rates. The government has been aggressive in attempting to aid the housing markets through lower refinance rates and attractive mortgage rates aimed at helping to bring more buyers into the market. The current market is there working in a bit of a paradox state. The normal rules that have historically applied to the mortgage industry, have been greatly impaired with the governments actions, making the future of the mortgage industry difficult to predict and placing the prediction of mortgage rates all the more difficult.

In a traditional marketplace, refinance rates tend to move in connection with the stock market. Rates, which are heavily tied into the trading of bonds and equities have been relatively unchanged this year, no matter what events occur in the stock market. The stock market has witnessed a rise of over forty percent since early March of this year, yet fixed rates have essentially been unchanged. The largest impact on mortgage rates this year occurred when fears over the U.S. debt level surfaced, dramatically increasing the yield on treasury bonds, and bringing fixed mortgage rates up to near six percent. This move occurred in early June, and quickly subsided, helping to bring long term rates down to their current levels of near five percent.

The future could be greatly influenced by actions of the Federal Reserve. A move by the Fed to end their purchase of mortgage backed bonds, could quickly lead to an escalation of mortgage rates. Today, there remain few options for lending on the secondary mortgage market, excluding government backed programs such as FHA, Fannie Mae or Freddie Mac. The lack of demand for mortgage securities could influence the government into an extended period of purchasing these bonds. The recent improvement in the housing market may help with bringing new investors into the secondary mortgage market, a move the Fed is closely watching and a welcome sign that the credit markets are returning to normal. The Fed would be ecstatic with unwinding their assistance in this market, with the return of private capital to take its place, and potentially allowing for rates to state at or near current levels, offering attractive purchase and refinance rates. This would truly be the best case scenario for the mortgage industry, but to date appears at least six months away.