Story summary: The Fed recently announced it could scale back its MBS-purchasing program, known as QE3, by the summer of 2013. This could cause mortgage rates to rise later this year.
In September of last year, the Federal Reserve announced it would start another round of asset purchases, or quantitative easing. Through its ‘QE3’ program, as it became known, the Fed purchased billions of dollars worth of mortgage-backed securities (MBS) each month. It was part of a two-pronged approach to keep interest rates low.
The weak job market was their biggest concern at the time. According to a Federal Open Market Committee (FOMC) press release dated September 13, 2012: “The Committee is concerned that, without further policy accommodation [like quantitative easing], economic growth might not be strong enough to generate sustained improvement in labor market conditions.”
So they began purchasing MBS assets in order to put downward pressure on mortgage rates and other interest-based products. The Fed also adjusted the federal funds rate (which banks charge each other to borrow funds overnight) in order to keep interest rates low.
Their efforts have paid off. The average 30-year mortgage rate today is lower than it was when they started QE3.
- September 13, 2012 (start of QE3): Average rate for a 30-year fixed mortgage loan was 3.55%.
- Today, April 25, 2013: Average rate for a 30-year mortgage was 3.40%.
So the benchmark rate has dropped by 15 basis points (0.15%) since the latest round of quantitative easing began. Mission accomplished, so it seems. But the end of QE3 appears to be on the horizon.
QE3 Ending Later This Year?
John Williams, president of the Federal Reserve Bank of San Francisco, said the U.S. economy could soon reach a level of economic improvement that justifies a slowdown of QE3.
“I expect we will meet the test for substantial improvement in the outlook for the labor market by this summer,” Williams said. “If that happens we could start tapering our purchases then.”
He added that the MBS-purchase program could be terminated completely by the end of 2013, if all goes as planned.
Mortgage Rate Outlook for 2013
So how might this affect mortgage rates in the U.S. for the rest of 2013? If the Fed does in fact scale back on QE3 this summer, we may see a slight increase in rates. Much will depend on what they do with the federal funds rate over the coming months. Fed officials previsously stated they would keep the federal funds rate at 0% – 0.25% for as long as the U.S. unemployment rate was above 6.5%. Unemployment is currently hovering around 7.5%, according to the Bureau of Labor Statistics.
The average 30-year mortgage rate has been on a downslide lately, dropping from 3.57% to 3.41% over a four-week period starting on March 28. This week the benchmark fell slightly to 3.40%, marking the fifth consecutive week of declines.
Despite the recent downtrend, most analysts have predicted the benchmark mortgage rate will rise by the end of 2013 — and perhaps significantly. The current outlook by the Mortgage Bankers Association (MBA), puts the benchmark 30-year rate at 4.1% by year’s end.
Disclaimers: This article includes forward-looking statements regarding mortgage trends and other economic conditions. These statements were made by third parties that are not associated with this website. They represent the opinions of the individual authors and speakers, and do not necessarily reflect the views of the publishers. We make no claims or assertions about the future of mortgage rates in 2013.