2 reasons low mortgage rates may be here to stay

June 14th, 2012

Thirty-year mortgage rates ended May at a new record low. The end-of-month level of 3.75 percent is so far outside historical norms that the natural reaction is to wonder whether this can last for very long. As unusual as current mortgage rates are, recent economic developments have actually helped ensure that low rates will be available for a while longer.

Two recent statistics, both from the Bureau of Labor Statistics (BLS), help demonstrate why low mortgage rates are not only here today, but may actually have some staying power:

1. Weak employment growth

Job growth has been closely watched in recent months, and the picture hasn't been pretty. After a strong start in January, job growth has tailed off in each subsequent month this year, with just 69,000 new jobs being created in May.

This loss of momentum by the economy supports low interest rates generally, and mortgage rates in particular may benefit if the Federal Reserve is prompted by sagging job growth to try new stimulative measures. With short-term interest rates already barely above zero, the Fed's recent initiatives, such as "Operation Twist," have focused on bringing long-term rates down. This has already helped reduce mortgage rates, and the Fed may be inclined to consider continuing such policies when the Open Market Committee meets during the third week of June.

2. Disappearing inflation

A couple weeks before the last employment report, the BLS released its monthly Consumer Price Index figures, which showed that there was no overall inflation during April. This is significant because the Fed is required to balance stimulative policies with keeping a lid on inflation. Earlier in the year, inflation had been perking up, but with oil prices having reversed course, it seems that inflation is back under control. This clears the way for the Fed to consider new stimulative polices that could benefit mortgage rates.

The above developments, particularly the low number of new jobs being created, are symptoms of significant economic problems. Still, this environment is creating rare opportunities for new home buyers, as well as for people who are in a position to refinance. If enough people can take advantage of those opportunities, it should eventually help the broader economy. After all, the cheaper housing costs become, the more money becomes available to spend on other things.

Posted By :

Richard Barrington has earned the CFA designation and is a 20-year veteran of the financial industry, including having previously served for over a dozen years as a member of the Executive Committee of Manning & Napier Advisors, Inc. Richard has written extensively on investment and personal finance topics.

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