Lower Mortgage Rates Are Not Expected

Industry analysts say consumers who have been hoping for lower mortgage interest rates likely will be disappointed.

The Federal Reserve has cut short-term interest rates six times since the first of the year, yet average 30-year mortgage rates have actually gone up a little.

“I can’t blame the consumer for being frustrated,” said David Lereah, chief economist for the National Assn. of Realtors. Economists say that while the Federal Reserve action gets a lot of media attention, most borrowers don’t understand that the rate cuts don’t govern long-term rates like mortgages.

“There is a disconnect between the Fed Reserve, the media and the public,” said Mark Dotzour, chief economist with Texas A&M; University’s real estate center. “People hear the Fed is lowering interest rates and automatically think that means lower mortgage rates.”

Indeed, Fed rate cuts may have the opposite effect of keeping mortgage rates high.

“Every time the Fed reduces rates, the bond market thinks it is inflationary and they are raising rates,” Lereah said. “Bond traders and investors are worried about inflation right now and there is very little we can do about it.”

Mortgage investors are worried that the Federal Reserve’s actions will cause the economy to pick up speed resulting in inflation next year, says Doug Duncan, economist with Mortgage Bankers Assn. of America.

“The Fed is signaling an aggressive posture to get economic activity started,” Duncan said. “The bond market doesn’t like that. We actually think mortgage rates will move up a little bit in the third quarter,” he said.