Will Rates Fall Below 3 Percent?

by Shilpi Paul

Will Rates Fall Below 3 Percent?: Figure 1
Fed chairmen and QE3 architect Ben Bernanke. Photo courtesy AP.

Last week, we reported that the average on a 30-year fixed-rate mortgage reached a new low of 3.40 percent. Will QE3 eventually pull them below 3 percent?

QE3, the popular shorthand for the third iteration of Quantitative Easing, is basically the Federal Reserve’s attempt at jump starting the economy. By buying up $40 billion in mortgage-backed securities every month, the Fed is hoping that banks will feel comfortable offering more loans, consumers will seek out more loans, and the economy will generally start moving more robustly.

Our big question is how exactly QE3 will impact mortgage rates and the housing market. Will rates drop below 3 percent? Rates are already at historic lows; how long will they stay there? What are the implications of low rates?

To gain some insight into these questions, UrbanTurf reached out to a few real estate experts, from lenders to economists. Check out their thoughts below.

John Settles, Branch Manager and mortgage consultant, Wells Fargo

QE3 alone won’t [push rates under 3 percent]. However, the fiscal cliff and/or falling back into recession, or a sovereign default in Europe aiding QE3 will push rates under 3 percent. As for how long they will remain low, they will be under 4 percent for one year, max two.

Jonathan Miller, President, Real Estate Appraisal and Consulting Firm Miller Samuel

The simple answer [to the question of how long rates will remain at historic lows] is, “who knows?” since few, if any, thought we’d be seeing record lows in mortgage rates now. However, I’d guess that QE3 won’t push mortgage rates much lower. Mortgage lenders already pared back on staffing to handle mortgage processing and are unlikely to rehire to expand capacity, so it’s unlikely that they would feel much of an incentive to press rates lower. In fact, low mortgage rates are keeping credit standards as high as they have ever been in decades. I think they will be more interested in enjoying the spread [the difference between the rates at which they borrow and re-lend to consumers] by keeping rates close to where they were before QE3 as their cost of borrowing drops.

I can’t imagine rates going down more than another 0.25 point [to 3.15 percent], but of course that was the common refrain a few years ago. I’m hoping this flawed strategy ends soon so we can deal with reality. The longer the housing market is built around artificially low mortgage rates, the longer and more difficult it will be to ween consumers off of them. A housing recovery is dependent on easing of credit standards to more historic normal levels (but not the nonexistent standards of the prior decade). Low rate policy by the Fed is telegraphing to the banks that they expect more problems ahead, and that makes lenders more firm in their resolve to keep credit standards tight.

Jed Kolko, Chief Economist, Trulia

The Fed’s plan to buy mortgage-backed securities in order to push interest rates – and especially mortgage rates – lower is likely to:

  • Have a moderate effect on refinancing. The decision to refinance depends on the gap between the current market rate and the rate a homeowner is already paying. Lower mortgage rates will encourage some homeowners to refinance. However, rates have been low and dropping for years, so many people have already refinanced and might not find it worth it to refinance again.
  • Have little effect on home-buying. The decision to buy depends on many factors. Lower mortgage rates make homeownership cheaper – and today’s low rates are a big reason why buying is 45 percent cheaper than renting nationally. But the main obstacles to homeownership today are saving enough for a down-payment and qualifying for a mortgage under today’s high credit standards. Lower mortgage rates alone won’t lead to lots of new home-buying.
  • Have almost no effect on foreclosures. The overhang of foreclosed homes remains a problem for the housing market. Lower mortgage rates do not make borrowers better able to pay their mortgage and avoid foreclosure unless they can refinance – and most refinancing programs require borrowers to be current on their payments. People on the verge of losing their homes won’t benefit.

Overall, the main effect is to encourage some refinancing. Refinancing helps stimulate the economy because homeowners who refinance get a lower monthly mortgage payment and therefore have more money left over to spend on other things. Lower interest rates (aside from mortgage rates) will provide general economic stimulus, as well, which should help housing demand, so QE3 will give the housing market some indirect help, too.

See other articles related to: mortgage rates

This article originally published at https://dc.urbanturf.com/articles/blog/will_rates_fall_below_3_percent/6101


  1. jag said at 4:30 pm on Wednesday October 3, 2012:
    Banks will continue to pocket a higher and higher % of profit and only pass along a tiny fraction of the savings in marginally lower rates. No way we get below 3%.
  1. Where the hell is Mr. Galt? said at 8:13 pm on Wednesday October 3, 2012:
    As my grandmother used to say; oy vey! No matter how you spin this it’s not good news. Japan had interest rates below 3% for over a decade when they had monitory policy and overall economic policy that closely resembles where we are today. Of course they also had a decade with 1% GDP growth and incredible stagnation just like we have today so if you think that rates dropping below 3% is something to celebrate, think again. The incredible ineptitude or the O administration and the Fed is just mind blowing. How can history repeat itself in only several short years? Oh and "jag", if I were the banks I'd be keeping as much of that spread as possible too; when you know (and trust me they know) that we're heading right back into the sh*t can they better hang on to every penny because there won’t be any money for bailouts on the other side of this mess!
  1. kimmy gibbler said at 8:22 pm on Wednesday October 3, 2012:
    how to write an article about interest rate predictions step one: write down a couple paragraphs. step two: put a super close-up of Bernanke's face at the top
  1. jag said at 3:57 am on Thursday October 4, 2012:
    Too much koolaid for Mr. hell.

DC Real Estate Guides

Short guides to navigating the DC-area real estate market

We've collected all our helpful guides for buying, selling and renting in and around Washington, DC in one place. Visit guides.urbanturf.com or start browsing below!

Northern Virginia

Profiles of 14 neighborhoods across Northern Virginia

Looking to Give People A Reason to Stay Past 6pm
Happily Straddling the Line Between City and Suburb
Columbia Pike
Arlington’s Neglected Stepchild is Getting a Makeover
Crystal City
Turning Lemons into Lemonade
Lyon Village
Developing An Air of Exclusivity?
Hitting Its Growth Spurt
An Urban Village Hitting Its Stride
Del Ray
Virginia’s Small Town Near the Big City
Eisenhower Avenue
The Vibrancy Might Take a Few Years
The Quiet Neighborhood By the Beltway
Old Town
Mayberry By The Potomac
132 Commerical-Free Acres
Downtown Falls Church
Staying the Same in the Midst of Change
Tysons Corner
Radical Change Could Be On The Way

See more Northern Virginia »


Profiles of 14 neighborhoods in suburban Maryland

Small-Town Living in the State Capital
Bedroom Community Gets Buzzing Cache
Cabin John
In With The New While Maintaining the Old
Chevy Chase
Affluence, Green Lawns and Pricey Homes
Downtown Silver Spring
Experiencing a Resurgence After a Bumpy History
A Suburb on Steroids
Rockville Town Square
Despite the Dynamism, Still Somewhat Generic
Takoma Park
More Than a Little Bit Quirky
A Foodie Magnet on the Verge of Change
Capitol Heights
Kudzu, Front Porches and Crime
Glass Half Full or Half Empty?
Mount Rainier
Artists, Affordable Homes and A Silo Full of Corn
National Harbor
A Development Rises Next to the Potomac
Riverdale Park
A Town Looking For Its Identity

See more Maryland »

Northwest DC

30+ neighborhood profiles for the city's biggest quadrant

16th Street Heights
DC's Sleeper Neighborhood
Where (Almost) Everyone Knows Your Name
AU Park
One of DC’s Last Frontiers Before the Suburbs
DC’s Northern Neighborhood on the Cusp
DC’s 535 House Neighborhood
Cathedral Heights
Do You Know Where That Is?
Chevy Chase DC
Not to Be Confused With the Other Chevy Chase
Cleveland Park
Coming Back After A Rough Year
Columbia Heights
DC’s Most Diverse Neighborhood, But For How Long?
An Island of Serenity East of the Park
Dupont Circle
The Best of DC (For a Price)
Foggy Bottom & West End
Where the Institutional Meets the International
Forest Hills
Ambassadors and Adventurous Architecture
Foxhall Village
350 Homes Just West of Georgetown
Friendship Heights
A Shopping Mecca With a Few Places to Live
History, Hoyas and H&M
Glover Park
One of DC’s Preppier and More Family-Friendly Neighborhoods
A Posh View From Embassy Row
LeDroit Park
A Quiet Enclave in the Middle of the City
Logan Circle
Trendy Now, But Not By Accident
Mount Pleasant
Sought-After Homes Surround Main Street in Transition
Mount Vernon Triangle
From Seedy to Sought-After
The Long, Skinny Neighborhood at the City’s Northwest Edge
Park View
It’s Not Petworth
Penn Quarter/Chinatown
DC’s Go-Go-Go Neighborhood
Getting a Vibrancy of Its Own
The Duke’s Former Stomping Ground
Shepherd Park
DC’s Garden of Diversity
Spring Valley
A Suburb With a DC Zip Code
Not To Be Confused With Takoma Park
Not Quite Like Its Neighbors
U Street Corridor
The Difference a Decade Makes
Woodley Park
Deceptively Residential
Adams Morgan
No Longer DC’s Hippest Neighborhood, But Still Loved by Residents

See more Northwest DC »

Southwest DC

The little quadrant that could

Southwest Waterfront
A Neighborhood Where A Change Is Gonna Come

See more Southwest DC »

Northeast DC

Profiles of 10 neighborhoods in NE

New Development Could Shake Up Pastoral Peace
A Little Bit of Country Just Inside the District’s Borders
Not to Be Confused With Bloomingdale
Fort Totten
Five Years Could Make a Big Difference
H Street
A Place To Party, and To Settle Down
The Northeast Neighborhood That Few Know About
Michigan Park
A Newsletter-On-Your-Doorstep Community
Evolving from a Brand to a Neighborhood
Ripe for Investment Right About Now
The Difference 5 Years Makes
Big Houses, A Dusty Commercial Strip and Potential

See more Northeast DC »

Southeast DC

6 neighborhoods from Capitol Hill to East of the River

Capitol Riverfront
Still Growing
Hill East
Capitol Hill’s Lesser Known Neighbor
Congress Heights
Gradually Rising
Notable for Its Neighborliness
Historic Anacostia
Future Promise Breeds Cautious Optimism
Eastern Market
A More European Way of Living

See more Southeast DC »