How low is too low for mortgage rates?
It’s a common assumption that mortgage rates can go only so low.
In other words, there’s a “floor” below which home purchase and refinance rates can’t fall.
That assumption, though pervasive, could be dead wrong.
With mortgage rates already near all-time lows, and a widely expected recession looming, we could see rates hit fresh records, shattering all previous notions of what a low rate is.
Could this be the dawn of a new era in mortgage rate history? It’s looking more likely every day.
Predictions of ultra-low rates
In March 2019, The Mortgage Reports predicted rates in the 3s. The 30-year fixed-rate was at 4.28% at the time, according to Freddie Mac.
Rates now? 3.49% as of the most recent Freddie Mac survey.
But by forecasting standards, our predictions were tame. Now, many mortgage market experts are weighing in with even bolder calls.
Lawrence Yun, chief economist at the National Association of Realtors predicts rates of 3.3% by year’s end. That would put rates at their lowest levels ever, below the 3.31% of late-2012.
This aligns with mortgage commentator Barry Habib’s prediction of the lowest rates in recorded history.
In the next 12 months, says Habib, “mortgage rates will be the lowest they’ve ever been.”
We’re entering a very exciting time for home mortgage and refinance shoppers.
Will rates drop to 2%? How about 1%?
In decades past, it was thought that rates could never fall below 5%. Later, the same “floor” was applied to 4%.
Then in 2012, mortgage rates fell past 4% and kept going, all the way down to 3.31%.
Now, another psychological floor has been built at 3%. There’s no way 30-year fixed rates could drop into the 2s. Or could they?
History has proven that there’s no floor for mortgage rates.
History has proven that there’s no floor for mortgage rates. As long as investors can buy mortgage-backed securities while preserving capital, there’s no limit to how low mortgage rates could go.
Rates could fall to 2% or even 1%. But it might not stop there.
According to former Fed chief Alan Greenspan, bonds bearing negative interest rates could be on their way to the U.S. In fact, Germany, France, and Japan are already issuing government-backed bonds yielding a negative return for investors.
Typically, mortgage rates run higher than government-issued bond yields.
But as a Danish bank has already proven, negative mortgage rates are not only possible but a reality in today’s ultra-low-interest world. The bank is already issuing fixed-rate mortgages at minus 0.5%.
There’s no floor for mortgage rates, and those who say different will be proven wrong again and again.
Recession looms but the Fed is short on tools
Back in the late 2000s, with a recession at the door, mortgage rates were around 6.5%
The Fed issued stimulus such as cutting the federal funds rate and buying up mortgage-backed securities.
Mortgage rates were sliced in half by 2012. That stimulated the economy, but “high” 6% rates never returned.
Here we are, with rates near 3.5% and another recession looming. In August, the 2-year/10-year yield curve inverted, a phenomenon that has accurately predicted the last seven recessions.
This time, though, the Fed is short on tools to combat a recession. Look for the Fed to pull out serious measures if the economy turns.
Mortgage rates could be the strange beneficiary of drastic Fed moves. In short, mortgage rates fall in hard economic times, and fall even further based on Fed stimulus.
Get ready for never-before-seen mortgage rates if unemployment creeps up and economic reports turn sour.
When will rates drop to new lows?
Mortgage rates are already near all-time lows. The home purchase or refinance consumer can’t go wrong by capturing today’s rates.
And, forecasts are typically wrong, either by scale or timing. Predicting markets is tough indeed.
If you’re in the market for low rates, they are here now. Get started on your ultra-low rate request below.