Curve

Could we see 2% mortgage rates before this is all over?

Peter Miller
The Mortgage Reports contributor

2% mortgage rates

Is it really possible that we’ll see 2% mortgage rates in the next year or so?

No doubt some folks laughed when we suggested earlier this year that mortgage rates would drop to the 3% range. But here we are. Freddie Mac is showing 30-year rates at 3.84% as of late June while 15-year financing is priced at 3.25%.

The very same factors which led to 3% financing are likely to lead us into the world of 2% mortgages. There’s an ongoing imbalance between investors with cash and people who want to borrow. Cash is everywhere and more of it is likely coming to a mortgage lender near you.

Show Me Today's Rates (Jul 15th, 2019)

Mortgage rates and the Fed

Everyone has been watching the Fed to see what it will do with bank rates. In June it punted and did nothing, but many economists believe that lower rates lie ahead, perhaps as early as July.

This sounds good for borrowers in general, but there’s a difference between the bank rates regulated by the Fed and the mortgage rates paid by homeowners.

Using such wisdom and insight as it might have, the Fed sets bank rates while mortgage rates float with the market, free of government interference.

Right now, market forces greatly favor borrowers.

Show Me Today's Rates (Jul 15th, 2019)

Mortgage rates and context

Today’s rates are remarkably low. Not at record levels, but not far off. For context consider these facts from Freddie Mac weekly mortgage interest reports.

  1. Between April 1971 and the end of 2018, the average borrower paid 8.08% for mortgage interest. Current rates are less than half the historic average – and fading fast.
  2. From January 1st through June 20th mortgage rates in 2019 averaged 4.21%.
  3. In October 1981 weekly mortgage rates reached 18.63%, the record high. That’s not a typo.
  4. In November 2012 weekly mortgage rates hit 3.31%, the record low.
  5. In the four weekly reports between May 30th and June 20th, the average mortgage rate was 3.87%, roughly a half percent above the record low.
  6. Between the week of November 15th and June 20th, mortgage rates went from 4.94% to 3.84%, a drop of 1.1%.

You can see the trend. Mortgages rates are remarkably low now and it’s very possible that rates can actually drop further.

Rates dropped more than 1% in the last 7 months. Another 1% drop would put rates in the high 2% range, breaking every record in the books for US mortgage rates.

A 30-year fixed rate in the high 2s is certainly possible.

The case for lower mortgage rates

We don’t know what the future will bring but we know the world is awash in money. In an expanding economy there’s more demand for capital than during a recession. We don’t have a recession now; we have not had a recession since 2009, but we could have one soon.

Writing in the Washington Post, columnist Dana Milbank noted in late June that “the Duke University survey of chief financial officers recently found that 69 percent of U.S. CFOs expect a recession by the end of next year, brought on by weaker global economic growth and the effects of Trump-initiated protectionism. Similarly, JPMorgan Chase’s economic monitor this week put the chance of a recession within 12 months at 45 percent, up from 20 percent at the beginning of 2018.”

Sixty-nine percent of U.S. CFOs expect a recession by the end of next year

In a recession, rates typically fall as investors seek to park money in safe assets. Mortgage bonds are considered one of the safest assets. With higher demand for these bonds, rates can be rock-bottom and still attract investors.

Home sales are down, another sign of recession

Consider that existing home sales in May were down 1.1% from a year earlier according to the National Association of Realtors NAR).

The government reports that new single-family home sales were up 7% when compared with a year ago – but new home sales are a small part of the marketplace and don’t do much for overall sales numbers.

Housing is such an important factor of the overall economy. When home sales drop, investors start getting really nervous about the economy as a whole.

Uncertainty in markets usually leads to much lower rates.

Can 2% mortgage rates really happen?

So yes, it’s very possible that mortgage rates can fall below today’s levels. No guarantee, but not an unreasonable scenario either. If rates in the 2 percent range seem unlikely, consider this: mortgage rates in Japan are now at 0.41%. In France, there’s financing at 0.55%. Putting money into the US mortgage market with comparatively lofty 2% rates might not be a bad idea for many investors.

If you could make 2% in the US and one-half of one percent in Japan or France, which would you choose?

For investors, there’s no barrier to placing money in one place or another — money can travel across borders with electronic speed.

Should you wait for 2% mortgage rates?

Mortgage rates are extremely volatile and it’s impossible to say where they will end up before the recent drops are all over.

The best plan as a home buyer or refinance candidate is to secure a rate while it’s available. And right now, rates are favoring applicants like few times in history.

Verify your new rate (Jul 15th, 2019)