How low can mortgage rates go?

No one saw this coming

While a lot of forecasters thought we would see mortgage rates above 5% this year that hasn’t been the case. In fact, at the start of June interest rates for 30-year fixed-rate mortgage financing stood at 3.82% according to Freddie Mac.

The rates seen in early June are low, really low. The average rate paid by mortgage borrowers between 1971 and 2018 was 8.08%. As this is written mortgage rates are less than half the long-term average. Not only that, we’re not too far from the all-time Freddie Mac weekly low, the 3.31% seen in November 2012.

But how long with these ultra-low rates last?

How low can mortgage rates go?

No one can tell, but there are many predictions out there. Barry Habib, a well-known mortgage rate commentator, says mortgage rates will be “the lowest they’ve ever been” in the next 12 months. Yes, lower than the 3.31% 30-year fixed average seen in 2012.

Should home buyers and refinancing homeowners hold on for such a rate? Well, keep in mind that most mortgage rate predictions are wrong. But if you’re 6-12 months out from buying a home, this is a very good sign.

Low rates aren’t causing home prices to rise — yet

But if you think rates are low here look at Europe and Asia. Central banks in those areas have adopted negative interest policies. In Japan, 10-year mortgages have recently been available for 0.75%.

In Europe, according to the Business Insider, home prices rose 16% between 2015 and 2018. That’s because low rates allow more people to purchase, more buyers equal more demand, and the result is soaring home values.

In the US the market is strong but perhaps on the cusp of change.

While home prices are rising in the US they’re not rising as quickly as in the past. Black Knight reports that “in March — a month that typically sees the largest home price gains of the year - prices rose by just 1%, marking 13 consecutive months of home price deceleration.”

It adds that “the annual rate of appreciation has now slipped to 3.8%, the first time annual home price growth has fallen below its 25-year average of 3.9% since 2012.

Sales are also rocky. According to the National Association of Realtors, existing single-family home sales totaled 4.83 million in 2016, falling to 4.74 million in 2018.

But for home buyers, all this shouldn’t be taken as doom and gloom. It means lower prices and less competition when you go to buy a home.

The Federal Reserve & mortgage rates

In the US, the Federal Reserve has raised bank rates eight times since December 2016. The federal funds rate – the rate banks charge each other — has gone from .25% to 2.25%. The banks love it. According to the FDIC, bank net income reached $236.7 billion in 2018, up 44.1% from 2017.

Meanwhile, what about mortgage rates?

According to Freddie Mac, the average annual rate was 3.65% in 2016, rising to 4.54% in 2018. Mortgage rates have increased more slowly than bank rates. In fact, mortgage rates for the first five months of 2019 averaged just 4.24% and are headed lower as markets assume the Fed will start cutting the bank rate.

Interest rates, supply & demand

Money is a commodity. Rates are determined by supply and demand. Interest rates go up when demand is strong relative to supply. When demand is weak relative to supply rates fall.

A lot of attention is given to the Federal Reserve and its decisions to raise or lower bank rates. The Federal Reserve, we are told, is great and powerful, not unlike the Wizard of Oz. But notice that the Federal Reserve does not control interest rates in general. It controls bank rates. There’s a difference. If you don’t get money from a bank then you really don’t care what rate banks charge and in today’s world, 60% of government mortgages like FHA and VA are originated by non-banks.

The Federal Reserve does not control interest rates.

Also, because money can move across borders with electronic speed, investors can shift funds to wherever the combination of risk and reward is best.

If you have capital overseas maybe you want to move money to the US, a place where mortgages can yield more than a lot of foreign investments. Not only that, US mortgages represent little risk – according to ATTOM Data Solutions foreclosure rates in 2018 were at a 13-year low.

More cash invested in US mortgages helps push down mortgage rates.

What to do if you’re a mortgage applicant

If you’re looking for mortgage financing now there are some realities to consider.

• First, rates are low at this time relative to historic norms. That helps with monthly costs and affordability. We don’t know where rates will be in six months or a year.
• Second, if you get fixed-rate financing you can lock-in mortgage costs for decades. If rates go up your mortgage payment for principal and interest will stay the same. Also, inflation starts working in your favor as you can pay off your loan with cheaper and cheaper dollars.
• Third, if rates fall you then have the option of refinancing, but this is a choice to consider only if it produces a material benefit for you.

All in all, it’s a very good time to be a mortgage borrower.

Check today’s rates

Today’s rates are less than half the historical average. But we don’t know how long they will stay that way.

Sure, they could go down, but they could go up as well. It could be the best environment for rate shopping for years to come.