Last year, most industry observers predicted that mortgage interest rates would rise in 2014, possibly hitting 5% or more. Yet rates have actually declined in recent months. While this is welcome for homebuyers, it can be confounding as well. What accounts for the change in expectation?
It’s all about supply and demand, according to a recent article in the Wall Street Journal.
With rates at historic lows, the market experienced a flurry of homeowners refinancing in recent years. But this activity has slowed significantly, reducing demand. In addition, there are fewer first-time homebuyers in the market today and more cash buyers than ever. This is keeping a lid on the number of new loans being originated. With lower demand overall, mortgage companies are maintaining low rates.
The Federal Reserve also factors into the equation. According to the WSJ, the Reserve had planned to taper off its purchase of mortgage- backed securities, which economists predicted would cause a rise in mortgage interest rates. Rates did rise due to this action last summer. But the tapering off ended up coinciding with the abovementioned reduction in mortgage originations, meaning that fewer securities were being issued. When the Fed began purchasing fewer of these securities, mortgage rates started to fall.
As the national economy continues to strengthen, experts agree it’s inevitable that rates will rise. While the time frame may be uncertain, those thinking of buying a home would be wise to act now, while interest rates remain at attractively low levels.
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