Mortgage rates: How low can they go?

Posted by: Svenja Gudell    Tags:      Posted date:  October 1, 2012  



After the Federal Reserve announced QE3 – the third round of quantitative easing – two weeks ago, rates have continued to steadily fall. This time around the Fed decided to buy mortgage-backed securities as the only asset to inject liquidity into the market. While rates are already at historical lows, it is surprising to some that rates aren’t falling quicker given this third round of easing.

Jody Shenn of Bloomberg wrote on Sept. 26 (http://www.bloomberg.com/news/2012-09-25/fed-helps-lenders-profit-more-than-homebuyers-mortgages.html):

“The Federal Reserve’s latest mortgage bond purchases so far are helping profit margins at lenders including Wells Fargo & Co. and JPMorgan Chase & Co. more than homebuyers and property owners looking to refinance. Since the Fed’s Sept. 13 announcement that it would buy $40 billion more securities per month, the rates offered for new 30-year loans have fallen by just 0.11 percentage point, compared with a drop of more than 0.6 percentage point for yields on the bonds into which the loans get packaged, according to data compiled by Bloomberg and Bankrate.com. The gap between the two, which typically signals increasing lender revenue when it widens, has reached a record of more than 1.6 percentage point. Fed Chairman Ben S. Bernanke’s stated goal of helping boost the housing market is being undercut by lenders’ inability to keep up with consumer demand, even as investors drive up bond prices. Banks have been slow to lower rates after being overwhelmed this year by applications to refinance mortgages.”

To see what exactly rates are doing and how conforming, expanded conforming and jumbo mortgage rates are moving in relation to each other, we took a closer look at the quotes given in our Zillow Mortgage Marketplace. Figure 1 below shows how rates for these three categories (more on these here) of mortgages have moved over the past several months.

Since the QE3 announcement, rates have indeed fallen. The average rate for a conforming loan last week was 3.4 percent, while a jumbo loan went for 4.1 percent. Rates will potentially keep falling if uncertainty in the European debt crisis or the U.S. economic situation increases.

The spread between conforming and jumbo loans has again widened. In a post from July 2011 entitled ‘Jumbo Credit Spread Back to Pre-Lehman Levels’ we talked about how the spread had shrunk to roughly 50 basis points, however the latest data shows that the spread had increased to 66 basis points last week, which compares with 53 basis points back in March 2012 (the beginning of this reporting period in our graph).


About the author
Svenja Gudell
Svenja is the Director of Economic Research at Zillow. To learn more about Svenja, click here