Mortgage rates have been generally plummeting for the last year+. But the Fed can’t really cut it’s prime lending rate too much lower. Is it even possible for 30-yr fixed mortgage rates to drop much lower than their current level (near/under 6%)?
(Not really an IMHO … just curious if it’s possible. Hence GQ.)
i don’t see why not. in the sixties, my parents got a 30 yr. fixed rate for 4.5. of course, the banks paid out at 2-3, so the institutions made a fair profit.
I agree with harry. Remember, during the depression in the US, the banks paid …NOTHING…on savings. Some banks would let you deposit your money as a good will gesture. But you collected zero interest. If the banks can borrow money at 1% or so, what’s to stop a 4% mortgage?
Rates can’t really go much lower without some serious slowdown in the economy. As in slowdown from here. You fall into the Japan trap of pushing on a wet noodle - cutting rates below a certain point simply does not do anything. Japan has had government rates at around 0% for a decade, and their economy is not improving (granted money supply was also choked off).
Think of it this way, with rates at 10% a lot of businesses, consumers, homeowners won’t invest/buy because the interest payments are simply too high. Now at 5%, a huge chunk of those people who would not finance at 10% now think 5% is doable. If the Fed cuts rates another 50 bps, how many more people are going to finance at 4.5% when they didn’t at 6% or 5%. Probably, only a very marginal amount.
Fixed rates are never going to happen again, at least for mortgages. Remember the S&L bailout? Sure a fixed rate can be had, but the lender then has to swap it into a variable rate, and of course will pass that cost onto the borrower. Net net, a fixed rate will be significantly higher than the variable.
When in doubt, ask FRED (Federal Reserve Economic Data)
[ul][li]Long Term Government Bond[/li][li]Three month T-Bill[/li][li]10-year Government Bond[/li][li]20-year Government Bond[/ul][/li]So yes, if you’re willing to believe that mortgages will always trade at some kind of reasonable spread off Treasuries, rates can go lower.
You should also note that the shape of the yield curve is variable: the fact that the Fed Rate is X does not imply that the 30-year rate will be Y. Thus, for example, when the Fed Rate was kept very low in 1993 to help bail out the S&L’s, the yield curve was abnormally steep, because everyone knew it wouldn’t last. So a lot of institutions (most famously Orange County) extended term to get some of that ever-so-risk-free extra yield and came to grief in 1994.
Similarly, Britain’s yield curve in the '90’s moved from very steep to flat, with the short term rate rising and long term rate falling. This was a textbook example of the different influences at work: the short end trades on monetary policy, the long end trades on expectations of inflation (mainly); so raising short rates may lower long rates if the market takes the view that this toughness will kill inflation.
Incidentally, one of my cherished scraps of trivia is that T-Bill rates went negative from time to time in the Great Depression, i.e., people were willing to pay more that $100 for a government $100 IOU, the rationale being that money kept in cash at home would get stolen, money invested in business would be lost and money deposited in the bank would be at risk of the bank going under, so what else is left?
However, on the Fed site, I can only see three month secondary market T-Bill yields going down to 0.15% or so - but these are weekly averages - if anyone can confirm the above story, please let me know.
People keep mentioning the Fed & the rates that they set, but those have nothing to do with mortgage rates (except in the most indirect way*).
Rates for 30-year mortgages tend to track the 10 year treasury bond rates. This is because they have about the same risk (especially when mortgages are secured with mortgage insurance) and about the same term (30 year mortgages usually aren’t held for more than about 10 years on average- due to refinancing, real estate sales, etc.). Rates on treasury debt have been declining lately because of the terrible beating that equity markets have been taking over the last couple of years. Individuals and institutions have been taking their money out of the stock market and putting it into bonds.
If the stock market starts to recover in a meaningful way and confidence in the market is restored, money will move back out of bonds and into stocks. That is when bond prices will fall (and rates will rise) and mortgage rates will follow. If the stock market continues to wallow in self-pity, mortgage rates will hold steady or fall.
friggin’ investment counselors have all the good data- and they post it before I finish with my explanation
jiHymas said
Do you mean your story about “people were willing to pay more that $100 for a government $100 IOU, the rationale being that money kept in cash at home would get stolen, money invested in business would be lost and money deposited in the bank would be at risk of the bank going under?”
Doubtful that it’s true. But it actually make sense.
Yes, that’s the story I mean. And if the weekly average of 3-month bills went to 0.15%, it is conceivable that the occasional 1-month (or shorter) bill actually went below 0. But I’d really like to know for sure.
Yeah - but you pointed out the short-rate to equities to bonds cross-current that helps keep life interesting, so not all is lost.
One thing that has propped up mortgage rates is the fact that housing has been strong, even when other sectors of the economy have been suffering. If housing goes in the dumper, demand will fall and so will interest rates on mortgages.
I would have agreed with your statement 20 years ago but not today.
In the old days, mortgage rates were determined by the bank, or S&L that made the loan and the intent was to own the mortgage. That’s seldomn the case today. Fixed rate mortgages are usually sold into a pool resembling a bond, and bond rates are very sensitive to Fed policy. This change in home financing is the major reason the interest rates for mortgages are almost indentical everywhere in the USA, which wasn’t the case a decade or two ago.
Then there’s variable rate mortgages, tied to T-Bill type rates, which again are very sensitive to Fed policy.
They are, but not in any deterministic way…for which I’m grateful, because if the Term Structure of Interest Rates were simple, I’d have to find another line of work! Mortgage bonds, in particular, are insanely complex due to the early pay-off option on mortgages … and that’s not even to mention effects like the weather (if a hurricane knocks a house down, insurance will pay off the mortgage - which is either a good or bad thing for the issuer depending on what the rate on the mortgage is compared to current mortgage rates).
In Canada, variable rate mortgages are priced as a spread off bank prime, which is determined almost exclusively as a spread off the Bank of Canada rate. I’m not sure how VR’s are priced in the States, but am confident that the relationship to the Fed Rate is quite precise, not at all comparable to longer-term mortgages.
kniz said
Unfortunately, this is a distinct possibilty. A very real probability. I don’t wish it, but indicators such as forclosures, etc. are indicating it may happen. If it does, it will be the death-knell.
I read a pundit’s take on the stock market/economy last week. He is a bear, and, unfortunately, so am I.
He related that banks, during the depression in the US, allowed people whose houses had been forclosed upon, to continue to live in the house if they would just pay the interest on the mortgage. After all, what would the banks want with unoccupied houses that they couldn’t sell? Makes sense.
Scary.
we are not at the level of a significant number of people losing jobs, then losing their houses, then the market flooded with foreclosed property scenario. That would be a nasty thing, but seriously, I don’t see that at the level we had in 1991 for example.
Secondly, and the very significant difference between the depression and now, is that the Fed has boosted money supply this time around. Not only are rates low, but there is money available to borrow. in the depression and in Japan today, the rates are low but not a lot of money available to borrow.