low mortgage rates economy federal reserve bond buying stimulus
Justin Sullivan/Getty Images
By Les Christie

Say goodbye to ultra-low mortgage rates.

In the past month, rates have been on the rise and they are expected to continue to climb. Last week, the average rate on a 30-year fixed-rate mortgage climbed to 3.81 percent, up from 3.3 percent in early May, according to mortgage giant Freddie Mac. Meanwhile, those seeking a 15-year loan received an average rate of 2.98 percent, up from 2.56 percent a month earlier -- a record low.

"It's unlikely that rates will ever be that low again," said Doug Duncan, Fannie Mae's chief economist.

Those who didn't take advantage of record-low rates have missed the boat -- at least for now. Here are three reasons why.

The Fed is going to stop bolstering the housing market. The Fed has kept rates at rock-bottom levels by buying up to $85 billion a month of Treasury bonds and mortgage-backed securities. That has enabled lenders to sell mortgage loans at low interest rates and recoup their money immediately -- plus profits.


"Up until recently, expectations were that the Fed would begin to taper purchases of mortgage-backed securities and Treasury bonds late in 2013, but that timeframe appears to have moved to September, possibly sooner," said Keith Gumbinger, vice president of HSH.com, a mortgage information company.

If the Fed stops purchasing the securities, private investors will have to pick up the slack. For investors to do that, the loans will have offer a better payoff. And that would mean raising rates for borrowers, said Duncan.

The economy is no longer reeling. During the recession, the Fed lowered its short-term interest rate to near zero in order to stimulate the economy. But now conditions have improved considerably since the economy emerged from recession four years ago. As the economic revival gains traction, it is creating a tailwind for interest rate increases, according to Gumbinger.

Low rates happen when the economy is in distress. But now, the market believes the economy is getting stronger, said Wendy Cutrefelli, a vice president in the Mortgage Banking Division of Bank of the West.

Job gains have picked up lately, averaging about 202,000 a month over the past six months.

That hiring is advancing rather than retreating is good news for the economy and any positive future reports are expected to push rates higher, according to Gumbinger. Even mediocre news might not cause any meaningful decline in rates.

3.3 percent rates are unprecedented. "The 30-year [mortgage rate] hit a 37-year low in 2003 at 5.23 percent," said Gumbinger. "That was the previous low-watermark prior to this financial crisis and it's likely we will move closer to that mark as we grind forward."

Any return to normal conditions, therefore, will likely be accompanied by higher mortgage rates.

For clues to the direction of mortgage rates, look at the daily movements in 10-year Treasury bond yields. Mortgage rates track Treasury yields with the difference between them holding fairly constant.

These days, Treasury bonds have been on a jumpy uphill climb, with the 10-year hitting 2.21 percent on May 31, its highest closing since April 2012. On Thursday, the yield was about 2.10 percent. Since the interest rate on a 30-year is usually 1.7 to 2 percentage points higher, it indicates that mortgages should be at between 3.82 percent and 4.12 percent this week.


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gardeoala

Rates have definitely helped keep real estate afloat. However, the real problems are unemployment, uncertainty, confidence in the economy, and tight mortgage lending standards.


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July 14 2013 at 3:37 PM Report abuse rate up rate down Reply
MR NUSSBAUM

Even if it is not the lowest ever below 4 per cent is a great rate.

June 07 2013 at 2:37 AM Report abuse rate up rate down Reply
vlady1000

Yep, we all knew it was coming sooner or later. Those that sat on the sidelines not refi'ing or buying, are going to be kicking themselves. It was pretty obvious in the last 12 months, you have better make your move. Still not to late, but not as good as it could have been.

June 06 2013 at 5:30 PM Report abuse rate up rate down Reply
h.hughjardon

Fed's QE stimulus slowing or ending by September or sooner...which is why big uncle is looking to dump GM shares. The rally, which is due to the fed''s bond and securities purchases is about to end the rally, and big uncle wants to get out now even though we're still gonna lose.our asses.

June 06 2013 at 3:07 PM Report abuse +1 rate up rate down Reply