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30-Year Loan Rates Defy Expectations, Hit 14-Month Low
Defying expectations, mortgage interest rates last week continued the downward trend that has persisted since the end of March, with 30-year, fixed-rate loans averaging 5.56%, their lowest level in Freddie Mac's weekly Primary Mortgage Market Survey in 14 months.
As a result of persistently low mortgage rates, consensus forecasts of some slowing down in housing activity this year appear to have been confounded again, just as they have been for the past couple of years.
NAHB economists are now calling for 1.216 million single-family home sales in 2005, 1.4% higher than last year’s. They are also now expecting the cost of a 30-year home mortgage to be only marginally higher this year, averaging 5.9% compared to 5.8% in 2004.
Frank Nothaft, chief economist for Freddie Mac, attributed last week’s decline in mortgage rates to the government’s report of weaker-than-expected job growth in May.
“The May employment report came in at less than half of what was expected last month, which pushed bond yields — and mortgage rates — down further,” Nothaft said. “Consequently, markets are now speculating whether the Fed will continue raising rates at the same pace that it has been, or will it begin to moderate the frequency of its actions."
Nothaft said that he has lowered his forecast of where he expects 30-year, fixed-rate mortgages to be at the end of the year to somewhere between 5.9% and 6.2%.
Federal Reserve Board Policy has had little apparent impact on long-term interest rates despite a two-percentage-point increase in the federal funds rate, and Fed Chairman Alan Greenspan is among those who have been scratching their head trying to understand why.
In congressional testimony on June 9 before the Joint Economic Committee, Greenspan called the “pronounced” decline in long-term Treasury rates “among the biggest surprises of the past year.”
Greenspan noted that “pressures” emerged in the financial marketplace last summer and this March to drive down rising long-term interest rates. “There remains considerable conjecture among analysts as to the nature of those market forces.”
With the Fed continuing to push up interest rates, most housing analysts agree that over the balance of the current economic expansion mortgage rates are more likely to reverse to an upward direction than to continue heading down.
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