Mortgage rates again fell record low levels this week, as the Federal Reserve's decision to buy billions in home loans for the foreseeable future continued to lower costs for would-be home buyers.
Mortgage finance backer Freddie Mac's weekly survey showed the average 30-year fixed-rate mortgage fell to 3.40% from 3.49% the previous week, which had matched the previous record low set in July.
The fixed-rate 15-year mortgage also hit a record low of 2.73%, down from the previous record of 2.77% a week earlier.
The Fed announced Sept. 13 that it would be buying $40 billion in mortgage-backed securities each month for the foreseeable future. The idea of the purchases, popularly known as QE3, is to spur economic activity by pumping more cash into the economy and driving down rates. Those taking out new home loans, either to purchase or refinance, will be among the first beneficiaries of the Fed's policy.
"This is what the Fed wanted to see. So far, so good," said Keith Gumbinger, vice president of HSH.com, a provider of mortgage information and analysis. He estimates that rates could continue to fall another 0.1 percentage point or so in the coming weeks as the full effect of the Fed action is felt by the market.
The low rates can help the economy even beyond the effect it has on the housing market, by putting more money in the pockets of homeowners who refinance. Someone who bought a house a year ago by borrowing $200,000 at the 4.09% 30-year rate can still reduce their payments by more than $1,000 a year by refinancing at the current rates. Savings are larger if they borrowed more money or paid higher rates.
But the lower rates also allow home buyers to pay more for a home, which many believe has been a factor in the recent turnaround in home prices. Frank Nothaft, chief economist at Freddie Mac, said the lower rates "should support an already improving housing market."
Last week, the National Association of Realtors reported a 7.8% gain in sales of previously owned homes compared to a year earlier, while the Census Bureau reported that housing starts and building permits rose substantially in August. This week, the Census Bureau reported a jump in the price of new homes sold in August.
But while the housing market is showing signs of improvement, prices and sales are still hurt by an excess inventory of foreclosed homes and continued jobs market weakness. The pace of sales and home construction is still well below levels that were typical even before the housing bubble.
While the lower rates are a positive for the housing market, Gumbinger said they are only part of the solution.
"Mortgage rates haven't been the impediment to home sales for quite some time," he said.
Gumbinger said many potential buyers can't qualify for the low rates due to recent foreclosures ruining their credit. And other buyers who might qualify still are reluctant to buy after watching the damage done by falling prices in recent years.
"There's a sizable part of the market that can't be served, or won't be served, by low rates," he said. "There's still a lot of people who don't have jobs, don't have equity or have bad credit."