The downgrade of U.S. sovereign debt from AAA to AA+ by Standard & Poor’s on August 2, 2011, had ripples throughout the interest rate market. The yields on U.S. government bonds paradoxically went down even further. The benchmark 10-year Treasury bond yield crashed to almost 2 percent from 2.8 percent on August 1. Multiple reasons exist for the bond market’s effective vote of confidence in U.S. Treasury securities. Among them is the turmoil in the European bond market. The salient point is that crashing bond yields had an impact in the mortgage rate market.

FHA mortgage rates are some of the most market-sensitive rates around, next to adjustable-rate mortgages. Since August 1, the FHA 30-year mortgage rate decreased dramatically from 4.36 percent to 3.96 percent on August 12. This incredible decline reflects lower interest rates across the board. After the Federal Reserve took the Fed Funds Rate Target to effectively 0 percent during the crisis of 2008, interest rates throughout the economy plunged. The Prime Rate as published by the Wall Street Journal has been 3.25 percent ever since. Mortgage rates have fallen to their lowest levels in years.

The disruption in the economy has distorted the results from mortgage rate calculator programs. In an ideal situation, interest rates would be the result of the supply of money relative to the demand for money. An extremely low Fed Funds Rate resulting in low rates throughout the economy unbalances the supply and demand of money. A mortgage rate calculator is thus biased by accommodative monetary policy. This affects the immediate and medium-term forecast for FHA mortgage rates. On August 9, the Federal Open Market Committee released its regular statement after a scheduled meeting to discuss potential changes in monetary policy.

The Federal Reserve committed itself to a ZIRP (zero interest rate policy) at least through mid-2013, or almost two full years. Market reaction was somewhat confusing as bond rates plunged than quickly recovered as stocks surged. One thing can be predicted with absolute certainty. Barring a true crisis in the U.S. government bond market, interest rates and thus mortgage rates will stay very low relative to historical levels. The real estate market is showing no signs of recovery, so it is not clear what impact the extension of ZIRP will have. Borrowers who wish to apply for FHA loans will be able to get very favorable rates for the next two years.