How Long Can Low Interest Rates Last?

Over the last 6-8 months it’s been hard to ignore the news that mortgage rates are at historic lows. Last fall as rates dropped, the demand for refinancing actually put pressure on banks, mortgage brokers and title companies to process and schedule everyone interested in taking advantage of low rates. During the fourth quarter of 2012 refinancing was as much as 80% of all new mortgages written.

The rates story hasn’t changed much with rates continuing to bounce around all-time lows for 15 and 30-year fixed rates mortgages in the early part of 2013. As a result bankers and mortgage brokers are being constantly questioned for our views on what we think lies ahead, and what advice we would offer based on our outlook. Before we offer advice, it’s important to briefly review how we got to where we are.

Part of the rates decline over the last 5 years can be directly attributed to the recession and financial crisis of 2007-2009, when high unemployment, financial market collapses, and lack of economic growth naturally dampened pressure on interest rates.

But we’ve also seen Federal Reserve actions taken in the form of Quantitative Easings 1, 2, and 3 (QE1, QE2, QE3) over the last 4 and a half years have a profound impact on interest rates, and particularly mortgage rates. Simply put, quantitative easing is the Fed buying assets like long-term Treasury bonds or mortgage-backed securities from banks and other financial institutions. This pumps money into the economy while reducing interest rates.

More recently, Fed chairman Ben Bernanke announced last September that QE3 would commit the Fed to spending $85 billion per month to buy 10-year Treasury bonds and mortgage-backed securities, and to continue to do so until the economy shows significant improvement.

When the Fed says “significant improvement” they’re looking first at unemployment; most experts think Bernanke has targeted 6.5% as a target that would signal improvement. They’re also watching U.S. economic growth and inflation as indicators of when they could back off on QE3.

Most economists see conditions gradually improving in the U.S., although unemployment, currently at 7.7%, isn’t expected to get much lower than 7.5% by the end of this year, and the forced sequester of Federal spending has people in many different business sectors nervous. The forecast for U.S. GDP growth continues to be modest, with inflation not really a near-term concern.

Everything we know now says interest rates should be relatively stable at least through 2013. Some forecaster predict a little upward pressure at the end of the year, but with rates as low as they are now, it wouldn’t take much to turn the needle up slightly.

So what kind of advice are we offering as the first quarter of 2013 comes to a close?

  1. First, if your current mortgage is a full percentage point higher than today’s rates for a comparable product, make a call to your bank or mortgage professional to lock in now! Even if you’re not quite at a full point, you could potentially benefit from refinancing depending on how long you plan to stay in your home. Conversely, if you’re over a full point but planning to sell soon you may not recoup your closing costs before the sale so maintaining your existing rate may be a smarter move. Talk to your lender to review your current plans.
  2. Second, if you think you’re ready to either buy your first home, trade up to your dream home or ready to downsize, start taking action. The current mortgage market is good for buyers and sellers, which means this could be the best year in residential real estate since 2007. It will likely move fast, so well-prepared buyers and sellers will do best. You can prepare by learning about local real estate values, and by going through the mortgage pre-qualification and pre-approval processes with your banker.

Our message to homeowners and want-to-be owners is pretty simple today: while rates a year from now might be as good as they are now, they also might be higher. And one thing we know for sure is that today they’re as low as we’ve ever seen them!

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