Interest Rates Reach Record Lows

At the beginning of February, Freddie Mac reported that mortgage interest rates reached record lows. Now, according to data from their newest weekly survey, those interest rates continue to drop.

Fixed Rates
The 15-year-fixed mortgage rate fell to its lowest level in 60 years, currently averaging 3.13%. The 30-year-fixed-rate at 3.88% was just a whisker away from its all-time low of 3.87%. Since October, 30-year-fixed mortgages have not exceeded 4%. Last year, for 30-year-fixed mortgages, interest rates stayed just below 5%. For the past 18 weeks, the rates have remained nearly 1% lower than the average of last year’s rates. At this time last year, the 15-year-fixed mortgage rate averaged 4.15%, a full 1.2% higher than the current rate.

Adjustable Rates
Average initial rates on 5-year adjustable rate mortgages (ARMs) were at 2.81%, just a tick above the record low reached a few weeks ago, 2.80%. The average last year for 5-year adjustable mortgages was 3.73%. With an adjustable mortgage, lenders are guaranteed a steady margin while borrowers may face changes in their payments over time.

Low Rates & The Economy
The low rates may be due to some of the recent economic developments both domestic and abroad. Here in the U.S., the unemployment rate is slowly decreasing which means the U.S. job market is strengthening. In February over 200,000 jobs were added to the economy. China’s growth into an industrial engine also contributes to the favorable market conditions. Finally, in Greece a debt exchange with private bondholders removes a default of sovereign debt from the table. With positive signs in the economy and historically low interest rates, housing sales should increase.

Sluggish Housing Market Despite Low Rates
These interest rates have been hovering at or around the record lows for quite some time. The unusually stable mortgage rates combined with rock-bottom housing prices means housing is more affordable than it has been in nearly two decades. Freddie Mac’s chief economist Frank Nothaft stated that typical families have more than double what is needed to purchase median-priced homes.

Despite these favorable conditions, consumer demand for homes remains sluggish. Uncertainty in the housing market and the economy in general is certainly responsible for the lack of enthusiasm. Even with plenty of income, low interest rates and affordable houses, potential buyers aren’t willing to commit to such a huge financial obligation as a home purchase.

Another possible factor to the lag in housing demand is more stringent credit demands. With some mortgage financiers requiring a 20% down payment on the purchase price of a home, many young consumers who otherwise qualify aren’t able to obtain a loan. These younger consumers are turning to the Federal Housing Administration (FHA). With as little as 3.5% down, potential homebuyers can obtain an FHA loan. The insurance costs associated with these federal loans, however, increases the mortgage interest rate.

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