Mortgage rates will likely tread water in July

The interest rate on the 30-year fixed-rate mortgage was near a record low in June and will very likely stay there in July.

The 30-year fixed averaged 3.33% APR in the first four weeks of June. For the week ending July 2, it had fallen to 3.07%.

Mortgage rates were remarkably anchored from April through June after the Federal Reserve intervened to stabilize rates and push them down.

But the Fed's intervention hasn't been entirely successful: Although mortgage rates have been remarkably stable, they are stuck at a higher-than-expected level. To put it more bluntly, rates should be lower.

Since March, the central bank has bought billions of dollars' worth of Treasuries and mortgage bonds "to sustain smooth market functioning, thereby fostering effective transmission of monetary policy to broader financial conditions," as the Fed explained in a June 10 statement.

The Fed is saying that its goal is to push interest rates, including mortgage rates, lower by buying Treasuries and mortgage bonds to calm and stabilize those markets. Stabilizing markets is a method, not the goal.

The Fed has succeeded in calming the waters. But it has only partly succeeded in its goal to push interest rates lower. For the Fed to declare victory in "fostering effective transmission of monetary policy to broader financial conditions," mortgage rates would have to fall another half a percentage point or so.

Maybe mortgage servicers, the companies that collect monthly payments and work with past-due borrowers, want to be paid for the increased risk they bear, and it's translating to higher rates. Maybe an undetected economic force keeps a floor on mortgage rates.

A more plausible theory is that mortgage rates will follow historical patterns and shamble lower until they have fallen roughly the same as Treasury yields. That's the conclusion reached by Bill Emmons, economist for the Federal Reserve Bank of St. Louis.

Using history as a guide, Emmons writes, "we would expect a further decline in mortgage rates of perhaps 0.5 percentage points." If he's right, mortgage rates might drop in July. Don't count on it, though. Not after these two months of stability; rates might continue to tread water.