Curve

Are 3% mortgage rates in our future? For some, they are already here

Peter Miller
The Mortgage Reports contributor

3 percent mortgage rates: Will they become a wide reality?

Mortgage rates are already much lower than many thought they would be in 2019.

For real estate borrowers, the new reality of lower rates means it will be much easier – and cheaper – to finance and refinance real estate as we enter the busiest time of the real estate season.

Rates were expected to hit 5% and keep going this year. Instead, we’re talking about the possibility of rates in the 3s.

What a wild and unpredictable financial world we live in.

Shop rates with the nation's top lenders here. (Apr 26th, 2019)

3 percent mortgages are already here for some

In a lot of cases, 3 percent mortgages have arrived, even for 30-year fixed loans. The Mortgage Reports daily rates survey revealed that FHA and VA loans have already fallen below 4% as of March 22, 2019:

Program Rate APR* Change
Conventional 30 yr Fixed 4.372 4.383 -0.08%
Conventional 15 yr Fixed 3.958 3.977 Unchanged
Conventional 5 yr ARM 4.063 4.694 Unchanged
30 year fixed FHA 3.688 4.675 -0.06%
15 year fixed FHA 3.625 4.575 Unchanged
5 year ARM FHA 3.688 5.17 -0.05%
30 year fixed VA 3.813 3.987 -0.5%
15 year fixed VA 3.688 4 -0.06%
5 year ARM VA 3.875 4.451 -0.05%
Your rate might be different. Click here for a personalized rate quote. See our rate assumptions here.

Predictions of sky-high rates fall flat

This was the year when mortgage rates were destined to top 5 percent according to many forecasters.

Zillow, for one, predicted last November that the 30-year, fixed rate mortgage would reach 5.8 percent in 2019, “territory not seen since the dark days of 2008.” In October, Freddie Mac said mortgage rates would be “rising to 5.1 percent in 2019 and 5.6 percent in 2020.”

Realtor.com forecast in December that 2019 mortgage rates would hit 5.5 percent.

Shop rates with today's top lenders. (Apr 26th, 2019)

The Fed scraps plans for future rate hikes

After four rate increases in 2018, the Federal Reserve surprised many when it elected not to raise the federal funds rate – the overnight rate banks charge one another – at its March meeting.

Many now believe there will be no Fed hike for all of 2019 and such thinking is beginning to impact the mortgage marketplace. On Friday, March 22nd, several yellow flags appeared.

  • The Dow Jones Industrial Average fell 460 points as investors moved money from equities to bonds
  • National Public Radio (NPR) reported that we are now seeing an inverted yield curve. The expression, said NPR, means “interest rates on long-term government debt fell below the rate on short-term bills. That’s often a signal that a recession is on the horizon.”
  • Mortgage rates fell to 4.372 percent according to The Mortgage Reports’ daily survey

It’s turning out to be the perfect storm for a low mortgage rate environment.

How are low mortgage rates changing the real estate market?

With lower mortgage rates we can expect both rising home prices and additional home sales.

Instead, the National Association of Realtors (NAR) reported something different for February. It said home prices rose to produce the 84th straight month of year-over-year gains. It also said February home sales fell 1.8 percent when compared with a year earlier.

According to NAR Chief Economist Lawrence Yun, each time mortgage rates increase 0.1 percent, the market loses 35,000 home sales.

According to NAR Chief Economist Lawrence Yun, each time mortgage rates increase 0.1 percent, the market loses 35,000 home sales. If sales are lost when mortgage rates rise then shouldn’t home sales increase when mortgage rates fall?

This is probably because on-the-fence home buyers have not gotten word that mortgage rates have fallen to 13-month lows.

If they knew that, they would likely be buying a home before rates rise again.

Shop rates with top lenders and verify your buying eligibility. (Apr 26th, 2019)

The new economy

The country relies on the Fed to steer the economy.

The idea is to have some inflation but not enough to distort the marketplace. A little inflation prods more purchases because people will want to buy before prices rise still further. More purchases are good for the economy.

To do its job the Fed relies on a number of economic models and standards. That sounds great until you realize the Fed is often wrong. As The New York Times explained in 2017, “the Fed aims to keep inflation at an annual pace of about 2 percent, but it has undershot that goal consistently since the financial crisis, and the Fed says it expects to miss the target again this year.”

The problem faced by the Fed is that the economy is changing. Change is okay but how do you reflect change in the economic models?

“The job market has consistently surprised the Fed,” says Bloomberg News. “America’s unemployment rate has fallen to less than 4 percent from 10 percent in 2009. Despite the decline, employers have found plenty of workers to hire, generally keeping job gains strong, and inflation has responded only weakly.”

The new economy is raising difficult questions for the Fed. Is a gig worker “employed” in the same sense as someone who works 40 hours per week?

The new economy is raising difficult questions for the Fed. Is a gig worker “employed” in the same sense as someone who works 40 hours per week? Shouldn’t an increase in the federal deficit result in higher interest costs because the government is competing with the private sector to borrow money?

The deficit has moved from $665 billion in fiscal year 2017 to an estimated $1.1 trillion this year. And what about the weather? How do bigger storms, earthquakes, and fires impact the economy?

The Fed versus the mortgage marketplace

It can be argued that the Fed’s position is especially weak in the mortgage marketplace. Sure, the Fed can raise bank rates but mortgage borrowers increasingly don’t get financing through a bank. According to the Mortgage Bankers Association (MBA), a majority of loans – 54 percent in 2017 – are now originated by non-banks.

While the Fed raised bank rates four times in 2018, for a 1 percent increase, mortgage rates went up by just .51 percent.

Non-banks get much of their money from investors. Their rates reflect the free-market supply and demand for capital. Sometimes the free market and the Fed value money very differently. For instance, while the Fed raised bank rates four times in 2018, for a 1 percent increase, mortgage rates went up by just .51 percent.

What we have today – at least with mortgages – is not the Fed leading the marketplace. It’s the mortgage market leading the Fed and that suggests still-lower rates ahead.

Take advantage of low rates

Mortgage rates are currently holding low. And while rates appear to be on a downward trend, they are also highly unpredictable.

The rule of thumb is to find a rate you’re satisfied with and lock in. Tomorrow, today’s rates may not be available

Check with top lenders and shop around to find your best rate.

Verify your new rate (Apr 26th, 2019)