Will Mortgage Rates Go Down?

The very end of October saw a decrease in mortgage rates. This was in response to the Federal Reserve not reducing its bond-buying program. While average loan rates on 30-year fixed-rate mortgages dropped to an average of 4.10-percent, the 15-year fixed-rate fell to 3.2-percent. In June, 30-year mortgages increased above the low 4-percent threshold that borrowers had long become accustom to.

The Federal Reserve did report they have seen signs of a weakening housing market. While this could be related to the economy, generally real estate markets decrease in the holiday months, with most buyers shopping in the spring and summer.

However, critics say that with the government’s October shutdown and intense battle over the U.S. debt ceiling combined with a reduction in federal spending, put a significant damper on economic growth, having a direct impact on the real estate market.

The Federal Reserve has also stated their intentions to maintain the economic stimulus, which is in the form of bond purchases. They have continually stated they will continue making these purchases until the economy sees strong employment growth.

President Obama also announced that he nominated the Federal Reserve Vice Chair, Janet Yellen, to become the new Federal Reserve Chair effective in January 2014. As a strong proponent of the economic stimulus, this makes many people feel comfortable that Yellen will stay the course.

So how are mortgage rates set and what economic factors influence the housing market? The Federal Reserve Bank was originally designed to keep the economy flowing. Regulating open market operations, they buy securities and reserves into the banking system, which ultimately decreases interest rates. When the Federal Reserve sells these bonds, interest rates in turn increase.

The Federal Open Market Committee (FOMC) has 12 members. Meeting eight times annually, their goal is to keep prices stable, while helping the economy grow and flourish. To accomplish these goals, they establish a federal fund rate, which is the rate banks must charge when they make sales to other banks with money deposited in the Federal Reserve. During these meetings, the FOMC lowers, keeps or raises the Federal Reserve’s fund rates, which has a direct impact on the mortgage rates charged by banks.

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