Why are mortgage rates still so low?

We are now heading toward the end of the spring homebuying season, and mortgage rates remain near record-low levels.

I predicted a few months ago that rates would gradually rise this year as the economy slowly demonstrated modest signs of improvement. This did start to happen. According to the weekly Freddie Mac Primary Mortgage Market Survey, 30-year fixed rate mortgages started the year at 3.34 percent and peaked at 3.63 percent on March 14.

Since then, however, mortgage rates have trailed back down and last week were at 3.51 percent, including an average of 0.7 points paid at closing. For context, that's only 20 basis points above the record low of 3.31 percent recorded back in November of 2012, so we remain at very low levels. A basis point is one one-hundredth of a percentage point, so we are within spitting distance of the historical bottom for mortgage rates.

These super-low rates have helped to boost the housing market. According to the National Association of Realtors, the median home price shot up 11.3 percent in the first quarter of 2013 to $176,600, compared with $158,600 in the first quarter of 2012. While the housing market is clearly recovering and home prices are rising, affordability of homes is still very attractive given the record-low mortgage rates.

With the stock market setting new daily record highs, one might wonder why mortgage rates are still so low. Usually when the stock market takes off, investors "rotate" out of bonds into stocks. This causes downward pressure on bond prices, which in turn increases interest rates. This affects both government bonds as well as mortgage-backed bonds, which in turn affects mortgage rates.

But we are seeing a different dynamic today. Investors are tired of getting a very low return on their idle cash, and they are increasing their stakes in the equity and bond markets alike. Essentially, cash is coming off the table and being deployed into both stocks and bonds.

Simultaneously, the Federal Reserve has reiterated its commitment to purchase approximately $85 billion of bonds each month to help keep bond prices high and interest rates low. The Fed has indicated that it will put a plan in place to stop this program at the appropriate time. But until inflation starts to show up, the Fed will most likely stay the course with this program to try to further stimulate the economy. And as the saying goes, "You don't want to fight the Fed."

So what should the average homeowner do with all of this information? First, it's a great time to refinance, if you haven't done so in a few years. This, of course, is dependent on your employment status, and your ability to get a home appraisal that satisfies lenders in today's tighter credit market.

Second, it may be a good time to buy your first home, or upgrade to your next home given the super-low mortgage rates and the rising home prices. But you need to think through this option very carefully, including how long you plan to be in your new home. The real estate market is a very cyclical market, and home prices can go up and down depending on factors outside of your control like the health of the economy, local unemployment rates and of course mortgage rates.

If you plan on being in your next home for a long time, it's probably a good time to think about making a purchase. If, however, you are only planning on being in your home for a few years, be careful and don't count on significant appreciation of your home's value.

Mortgage rates are at record lows, and one thing is for sure – these rates are not going to last forever. Homeowners need to think through these issues carefully and consider all their options. Visit my blog at MortgageRates.us to learn other tips to manage your home financing.

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ON THE WEB:

–How to decide if it's time to refinance: http://www.mortgagerates.us/how-to-decide-if-its-time-to-refinance/

–The appraisal puzzle: http://www.mortgagerates.us/the-appraisal-puzzle/

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ABOUT THE WRITER:

Tom Reddin, former president of LendingTree, writes for the Charlotte Observer about mortgages and home ownership. A version of this column previously appeared on his blog, MortgageRates.us. He runs Red Dog Ventures, a venture capital and advisory firm for early-stage digital companies.

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