How much lower will mortgage rates go?
That question is on the lips and minds of mortgage shoppers from Seattle to Miami. In recent months, rates have sunk to near historic lows, presenting Americans with a rare opportunity, according to economist Bob Walters.
"The best time to buy a house and refinance -- solely from an interest rate standpoint -- is now," says Walters, chief economist at Quicken Loans in Livonia, Mich.
Still, some shoppers continue to wait, hoping for a perfect world where rates dip south of 5 percent and recently stabilizing home prices resume their epic plunge. If history is any indication, such procrastination may be a mistake, Walters says.
"All of us who have been in the business for a while know that interest rates rise faster than they fall, and they usually rise in a very unexpected time frame," he says. "People could wake up to substantially higher mortgage rates at some point."
While it's impossible to predict what will happen to rates for the rest of 2009 -- and beyond -- many mortgage professionals are advising clients to act now.
"If you have plans to refinance or buy a home, don't wait," says Chris Sipe, a loan officer at America East Mortgage in Frederick, Md. "There is no logical reason to do so."
Fed fallacyPeople who dream of lower mortgage rates often pin their hopes on the Federal Reserve. The central bank's Federal Open Market Committee meets eight times each year and sets a target for the federal funds rate. It's widely believed that Fed decisions directly move mortgage rates up or down. But that's not true, says Walters, who contends that "there's not a great correlation" between Fed rate actions and mortgage rate movement. Instead, the anticipated inflation rate provides a better barometer of where mortgage rates are headed, he says.
"Mortgage rates are always going to be some percentage above what the expected inflation rate of the next 10 years or seven years is going to be," he says. "I tell people to watch that more than to watch (the) fed funds (rate)."
Dick Lepre, senior loan officer at Residential Pacific Mortgage in San Francisco, agrees that the Fed's role in moving mortgage rates often is overstated.
"It doesn't make much difference what the Fed does," he says.
Like Walters, Lepre keeps his eye on inflation when forecasting mortgage rate movements. Right now, inflation fears are rising, thanks to two years of massively stimulative monetary and fiscal policy intended to jolt the nation's faltering economy. Looking ahead, two Federal Reserve policies that have kept interest rates low are due to expire in the next few months.
In October, the Federal Reserve begins to wind down its campaign of buying $300 billion in long-term U.S. Treasury securities. A Fed effort to buy up $1.25 trillion in mortgage-backed securities is slated to expire at the end of the year.
So, it's possible -- although not certain -- the stars are aligning to drive long-term rates higher for an extended period, Lepre says.
"One can easily make the case that we will not see mortgage rates this low for the next 10 years," Lepre says.