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Mortgage rates fell to near-record lows — and there’s reason to think they will drop even lower in the future.
The 30-year fixed-rate mortgage averaged 3.24% for the week ending May 21, down four basis points from a week ago, Freddie Mac FMCC, -4.07% reported Thursday. That was just above the record low set earlier in May of 3.23%.
For the 15-year fixed-rate mortgage, the average rate dropped two basis points to 2.7%. Meanwhile, 5-year Treasury-indexed hybrid adjustable-rate mortgage averaged 3.17%, down one basis point from last week.
Also see: Existing-home sales slide to lowest level since 2010
This week’s decline in rates was prompted by comments from the Federal Reserve. “Mortgage rates slid today after a sobering assessment from the Federal Reserve of the tough economic road ahead,” said George Ratiu, senior economist at Realtor.com. The central bank downgraded its economic forecast ahead of its meeting last month, according to notes released Wednesday.
The Federal Reserve indicated that they would keep interest rates low for an extended period of time to help the economy bounce back from the coronavirus pandemic. But Fed officials have warned that the central bank’s effectiveness in addressing the economic impact of the outbreak could be limited if the U.S. doesn’t resolve public health issues.
“Even as the stock market has improved in recent weeks — normally prompting an upward move in mortgage rates — the still-uncertain outlook for the economy and seemingly low risk of inflation has kept bond yields in check,” said Zillow ZG, +4.77% economist Matthew Speakman.
Historically, mortgage rates have roughly followed the direction of long-term bond yields, including the yield on the 10-year Treasury note TMUBMUSD10Y, 0.660%. That relationship has diverged somewhat throughout the coronavirus crisis.
While bond yields and mortgage rates have both fallen throughout the outbreak, mortgage rates have not decreased as much as bond yields would suggest. That’s in large part due to friction in the mortgage industry caused by the massive wave of forbearance requests that servicers have received.
With millions of Americans skipping their monthly mortgage payments, firms have had to tighten their lending activity to cope, rather than drop rates.
However, the spread between bond yields and mortgage rates means that the mortgage industry has some wiggle room to bring rates down even further, Sam Khater, chief economist at Freddie Mac, said in his company’s weekly report.
Meanwhile, the quotes that borrowers actually see will likely continue to depend on their creditworthiness so long as the U.S. economy remains on shaky ground, experts said.
“Borrowers with great credit who are seeking a straightforward loan are being quoted at significantly lower rates than less creditworthy borrowers, resulting in a range of rates that tells a broader story than just the average,” Speakman said.
