Mortgage Rates Headed for the Bottom?

Mortgage rates have continued their descent that has lasted for a year and a half from what were already historic lows.  The combination of Federal Reserve purchases of mortgage-backed securities and economic uncertainties in the US and around the world have created the perfect storm pushing rates lower and lower.  But like everything it seems that is related to the economy—our historic run of low rates is cyclical and may be nearing an end.

The US Federal Reserve’s program of buying MBS was intended to accomplish two things: lower rates and buy time.  It has certainly accomplished the first goal which in turn has enabled millions of Americans to refinance mortgage loans and save money on monthly mortgage payments.  The goal of buying time was intended to provide stimulus to the economy while giving Congress and the President time to put together a long term fiscal plan to reduce spending, grow revenue and put entitlement programs on a more firm foundation for the future. Moreover, the Federal Reserve’s quantitative easing program also sought to provide stimulus to the economy while Europe sorted through their own long-running fiscal crisis.

Despite the outward appearance that we are no closer to a deal in Washington over the fiscal cliff, I believe we are actually going to see a compromise that reduces spending meaningfully and increases revenues modestly.  This will then provide a foundation for the real tasks at hand: long term tax reform and most importantly entitlement reform.

In Europe what appears to be a weakening economy may actually be the beginning of the final solution to their current problems.  Just today we learned that the European Commission approved the release of close to 40 billion euros to recapitalize Spanish banks.  Additionally, the recent decision to make new funding available to Greece to forestall insolvency takes that country’s struggles off of the front pages for a while.  While Europe is not about to turn the corner on their fiscal troubles, it is apparent their version of “buying time” is also working to avoid a deepening crisis.

With the US poised to address long term problems and Europe continuing to treat its wounds to avoid infection, the days of ever-lower mortgage rates may be coming to an end.

If you are in a position to take advantage of these all-time low mortgage rates for a purchase or a refinance—then now is the time to act.
By David Coster on November 28, 2012

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