Trends to follow to predict mortgage rate movements

May 13th, 2013

During the week of May 2, 30-year mortgage rates dropped by 5 basis points to reach 3.35 percent. This is very close to the record low of 3.31 percent reached on November 21 of last year. By March 14 of this year, however, the 30-year mortgage rate had risen all the way to 3.63 percent only to drop again pretty steadily since then. Could this latest drop in mortgage rates have been anticipated? The answer is qualified -- yes, but not with perfect foresight.

Mortgage calculators can help analyze recent rate activity

A mortgage calculator can help you evaluate current opportunities, but it can't predict the future. To get an indication of what the future might hold for mortgage rates, it does help to follow the fundamental trends that drive interest rates. There are two factors to consider: economic growth and inflation.

At the start of May, when 30-year mortgage rates fell to 3.35 percent -- just 0.04 percent above their all-time low -- keeping an eye on those two indicators of economic growth and inflation might have helped you see this drop in mortgage rates coming.

Following trends in economic growth and inflation

Economic growth and inflation are two key drivers of interest rates, both for fundamental reasons and because the Federal Reserve bases monetary policy on those factors. As long as the economy stays weak, interest rates are likely to stay low -- unless inflation forces the Fed and lenders to raise interest rates in response.

Knowing that, the most recent data would have suggested a downward trend in interest rates. On April 26, the Bureau of Economic Analysis announced that Gross Domestic Product (GDP) grew at a real rate of 2.5 percent in the first quarter, a fairly mediocre showing for economic growth.

A couple of weeks earlier, the Bureau of Labor Statistics had announced a 0.2 percent decline in the Consumer Price Index (CPI) for March. Put these together, and tepid growth gave interest rates no reason to rise, while declining prices gave them room to fall.

Of course, predicting the future is not an exact science. A loan calculator can tell you whether you can afford to buy a house or save money by refinancing based on present information -- and if you find a good deal with that kind of certainty, you may not want to wait for the future.

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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