Mortgage Rates In The 2s Are Not Far Off
Britain shocked the world by voting to exit the European Union (EU).
“Brexit” roiled world markets. Investors flocked to U.S. mortgage bonds.
Mortgage rates, in turn, broke through a floor of previous lows.
So, what’s next for mortgage rates? Do they go lower, or drift higher as markets absorb the news?
The answer could surprise us. We may be headed for a “new normal” for mortgage rates: 30-year fixed mortgages in the 2s.
How Brexit Changed Mortgage Rates
Brexit profoundly affected the U.S. mortgage rate market.
Here’s why: mortgage-backed securities (MBS) are a perceived safe investment. These bonds determine the rise and fall of mortgage rates.
Those who manage money — from institutional investors to private individuals — want to protect assets.
In times of uncertainty, investors flock to “safe” investments, driving up demand. Ultra-high demand for MBS drives down consumer mortgage rates.
In other words, U.S. mortgage consumers are the unlikely beneficiaries of global uncertainty.
And things don’t get much more uncertain than the situation in the eurozone right now.
There’s simply no precedent for Britain’s move out of the EU, a 28-country bloc originally formed to unify a region, and simplify political and economic policies across borders.
Member countries have only joined; Britain is the first to leave. Its exit may spur other members to de-couple from the consortium, causing a domino effect that destabilizes the region.
This is only conjecture, but the point is, investors are piling into time-proven assets, such as U.S. mortgage bonds.
Rates In The 2s: The New Normal?
Rates in the 3s and 4s have become “normal.”
But rates this low are a relatively new development.
Just ten years ago, 30-year fixed rates were solidly above six percent; experts considered rates in the 3s an impossibility.
Then the financial downturn of 2008 took rates to new lows. The government actively purchased mortgage-backed securities to lower rates and spur economic development.
Rates ended up in the low- to mid-3s by 2012.
Despite predictions of higher rates, mortgage rates have been below 4% for the last two years, and are heading lower after Brexit.
Now everyone is asking, “How low can mortgage rates go?”
It’s quite possible for rates to reach new, unheard-of levels once again. Remember, it was only a few years ago when today’s rates in the 3s were deemed “too low.”
Thirty-year fixed rates falling to the high-two-percent range: possible, and perhaps to become the new normal.
2% Rates: Three Trends That Will Take Us There
To be clear, rates are already in the 2s for some types of mortgages.
Mortgage rates for short-term fixed loans and adjustable rate mortgage (ARM) loans have settled solidly in the high 2% range since early 2016. Examples are as follows.
- 10-year fixed rate mortgage
- 15-year fixed rate mortgage
- 5-year ARM
- 3-year ARM
Thirty-year fixed rates prove more persistent about staying above the 3% barrier.
The lowest weekly average 30-year fixed rate on Freddie Mac’s books is 3.31 percent, which occurred on November 21, 2012.
Rates were so low back then because the U.S. government actively purchased mortgage-backed securities, driving up demand and lowering rates.
In effect, the same thing is happening now. But it’s not the U.S. government buying MBS, but investors the world over.
Without getting too technical, here are three trends that support rates crashing through the 3% barrier.
Trend #1: Frexit, plus more countries in line to leave
Brexit marked the first time a country has left the EU. But it might not be the last. The domino effect could be underway.
Five additional countries, most notably France (hence the term “Frexit”), are now talking about leaving the EU. Financial turbulence is coming, leading to more uncertainty and more demand for U.S. mortgage securities.
Trend #2: negative interest rates
MBS could become so attractive that investors park their money there at almost no return, in other words, a near-zero interest rate.
Banks, suddenly, could afford to issue a thirty-year fixed rate mortgage in the 2s; they could sell off that low-interest loan to hungry investors and still make a profit.
Why would an investor choose to get a very small return on an investment? Because it’s better than getting a negative return.
The central banks of Europe, Japan, and other countries, are now issuing negative-interest-rate investments in the form of government bonds. And people are buying them. There are simply not many safe places to park assets these days.
The stock market seems unsteady, and conservative money managers are staying away.
There could be a mad rush for safe-haven investments that pay something, albeit not much at all.
Trend #3: banks that want to lend
Perhaps the biggest barrier to two percent rates are banks themselves.
Banks often raise rates intentionally to slow down business, even if they could afford to slash rates further. They have the manpower to process only a certain number of loans.
But banks might not stand in the way of the upcoming 2% refi boom.
According to a Mortgage Bankers Association (MBA) weekly survey, refinance applications are not seeing significant movement upward despite steady rate decreases through 2016.
Market analysts see a refinance fatigue setting in: most home buyers who can refinance have already done so. Many of them have rates in the low-3s. Rates in the 2s may not increase refinance volume enough for banks to artificially raise rates.
Likewise, home purchase applications are seeing subdued movement, despite rates at 3-year lows.
Home buyers are more concerned with finding the right home than finding the lowest interest rate. Ultra-tight housing supply will keep a lid on the number of applications coming in the door at the nation’s banks and mortgage companies.
All this means that banks may not be as overloaded with new business as you might think. They could finally be willing to hand you the ever-elusive thirty-year fixed rate in the 2s.
2% Rates: Government-Backed Mortgages First, Then Conventional
This is how rates in the 2s will be rolled out: government-backed mortgages first, followed by conventional ones.
VA home loans typically come with rates at least one-quarter of one percent below those of conventional loans. According to mortgage origination software company Ellie Mae, VA rates have remained below conventional rates 24 months in a row.
As conventional mortgages tied to Fannie Mae and Freddie Mac drop close to 3%, VA rates will sink to the high-2s.
This will be welcome news to veterans who purchased or last refinanced their loans with a VA mortgage. The VA streamline refinance does not require an appraisal or income documentation, or even bank statements. Yet, it can drop a veteran’s mortgage rate to newfound lows.
Like VA loans, FHA mortgage rates will break through the 3% floor sooner than non-government lending programs.
The most popular of all low-downpayment loans, FHA could usher in an era of sub-three-percent rates due to its massive reach. More than one in five home purchases in the U.S. are completed with an FHA loan, according to the Department of Housing and Urban Development, overseer of the program.
FHA is not just popular with home buyers.
Homeowners with an FHA loan currently will be able to take advantage of plummeting rates, thanks to the FHA streamline refinance program. This loan can drop the homeowner’s rate and payment without an appraisal; and, no income documentation is required.
We could also see 2% USDA loan rates soon, too. This government-backed loan, designed for less-dense areas of the U.S., is meant to spur economic development outside of populous metro areas. A new wave of USDA home buyers could arrive on the scene if and when rates drop to irresistibly low levels.
Thanks to strong backing, government-sponsored loans come with very low risk to lenders. That translates to lower rates for the home buyer or refinancing household.
Government mortgages could soon to drop into the 2s, and conventional rates may not be far behind.
What Are Today’s Rates?
Mortgage rates are now approaching all-time lows, after recently shattering levels not seen in three years.
Get a rate quote today, since we don’t know what long-lasting effect “Brexit” will have in the markets. Rates could rise if the situation in Europe improves.
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