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FINANCIAL NEWS

Why are mortgage rates beginning to decrease in the US?

A confluence of economic factors has pushed down average mortgage rates in recent weeks, but they may not remain low for very long.

Update:
Mortgage rate fall
CARLOS OSORIOREUTERS

New data released by mortgage giants Freddie Mac has found that mortgage rates in the United States dipped for a second consecutive week, slowing alongside consumer spending.

The average mortgage rate on a 30-year fixed-rate mortgage fell by 15 basis points, to 5.1% annual percentage rate (APR), for the week ending 26 May. The average rate for 15-year mortgages also dropped slightly to 4.31%.

“Mortgage rates decreased for the second week in a row due to multiple headwinds that the economy is facing,” said Sam Khater, Freddie Mac’s chief economist. “Despite the recent moderation in rates, the housing market has clearly slowed, and the deceleration is spreading to other segments of the economy, such as consumer spending on durable goods.”

What is causing mortgage rates to fall?

Although there have been decreases in the past two weeks, the recent dip in mortgage rates should be viewed in the context of the past year. Rates remain far higher than they were 12 months ago, meaning that countless home-owners are being required to pay much larger monthly repayments than they had expected.

The recent dip can be seen as a readjustment after months of increases, something that brings the mortgage rate levels back in line with buyers’ expectations.

There has also been the effect of the recent stock market sell-off as investors look to get rid of shares and focus on the debt market. The new emphasis on this market has driven up the price of mortgage-backed securities investors, while lowering the mortgage rate for borrowers.

Joel Berner, senior economic research analyst at Realtor.com, explained: “This allowed mortgage rates to fall, even amid inflation-cooling policies initiated by the Federal Reserve. Despite the retreat of the last two weeks, the 30-year fixed rate is still 215 basis points higher than it was this week last year: 2.95%.

However the recent decrease could be short-lived as the Federal Reserve considers raising rates across the board in the coming months. At the May meeting, members of the Federal Open Market Committee (FOMC) voted to implement an increase on the federal funds rate of 50 basis points, the sharpest increase of its kind in 20 years.

If you are thinking of taking out a mortgage on a property, now could be a good time to do so. Unsure of which type of mortgage suits you best? Check out our handy guide to the five types of mortgage.

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