Proof Mortgage Rates Are Still Ridiculously Cheap

Even though mortgage rates have increased since the middle of last year, they're still ridiculously cheap from a historical perspective.

The going rate for a 30-year fixed rate mortgage is 4.32%, according to Freddie Mac. While that's almost a full percentage point higher than 2012's bottom, it's roughly half the 40-year average of 8.55%.

My point here is mortgage rates are still extremely cheap. On top of this, they're bound to go up -- or, at least, let's hope that's the case (if they don't, it means the economy is still sputtering along).

In the middle of last week, the Federal Reserve reconfirmed its commitment to reducing its monthly purchases of Treasuries and agency mortgage-backed securities. According to its official announcement:

Beginning in April, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $25 billion per month rather than $30 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $30 billion per month rather than $35 billion per month

While this may seem esoteric and innocuous, it's anything but that from an interest rate standpoint.

The central bank's purchases of long-term bonds are the precise reason mortgage rates are so low. Consequently, any reduction in these purchases, which is precisely what the Fed is engineering, will almost necessarily lead to higher borrowing costs.

When will rates increase and how much further will they go? It's impossible to say. But it'll happen sooner rather than later. And it's for this reason that, if you're thinking about buying a house, you should spend less time lamenting the trend and more time taking advantage of it.

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  • Report this Comment On March 24, 2014, at 4:28 PM, XXF wrote:

    Say what you will about the QE programs, at this point I very much doubt we're going to change anyone's mind, but the Fed's backing out of the program in increments of 5 or 10 billion at a time is absolutely the best way to proceed, so kudos to them for that.

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