Mortgage rates just blew through another record with the 30-year fixed rate dropping to 2.75%. If you have been watching the mortgage market, your head is likely spinning. How can mortgage rates go this low? Where do we go from here? How will the next president impact rates? What should you do? First, it is important to emphasize that the federal reserve does not control interest rates. They merely influence short term rates based on the federal funds rates. Long term rates (10-year treasuries) are market driven.
There are two drivers of long-term rates: Inflation expectations and Market Forces:
- Inflation Expectations: One of the major drivers Treasury pricing is driven by future expectations on inflation. Is the economy going to grow and are prices going to rise? As inflation increases, the yields on treasuries also increase. Future inflation is nonexistent at this point with the recent virus outbreak. This leads us to Market Forces as the primary driver today of the treasury market and in turn long term interest rates.
- Market Forces: This refers to basic supply and demand. Demand is driven by investors in the US along with many investors and countries abroad that park their money in US treasuries due to the safety and liquidity. The large demand for treasuries has increased prices and therefore kept yields (rates) at historic lows. On the flip side is supply. The more supply of treasuries, the lower the price and the higher the yield (remember they move in opposite directions). The borrowing needs of the US will continue to grow with deficit spending. The non-partisan congressional office (CBO) has confirmed this as well with deficits predicted to swell in the coming years
- Supply: The supply of treasuries will continue growing rapidly as the government ramps up deficit spending. The Coronavirus is forcing the United States Government to step in to assist the millions out of work (or underemployed) and support various industries that have been especially hard hit. The bigger budget shortfalls will add to the more than $10 trillion-plus rise in federal debt over the next decade that the Congressional Budget Office is already forecasting.” Treasury issuance will continue to rise as the budget shortfall increases. In a nutshell, supply will continue to increase which will drive prices down and yields up
- Demand: At the same time supply is starting to rise, the demand for treasuries is also increasing rapidly with investors clamoring for the safety of government bonds as other assets drop in value. As the Coronavirus spreads demand will continue to increase for safe assets like United States Treasuries.
What is causing the drastic swings in mortgage rates?
It has been tough to keep track of the huge swings we are seeing in the mortgage market. There are two primary drivers of the large price swings supply/demand pulls and mortgage demand.
- Supply/Demand pulls: 10-year treasury buyers are trying to figure out if demand or supply will end the tug of war. Recently treasuries were overrun with worries about supply which drove up the yields demanded. In the short term, I think supply will rule the discussion, but over the long term rates should settle back down as demand kicks in from international buyers continuing to clamor for safe assets.
- Mortgage Demand: When mortgage rates briefly dropped to around 3% owners rushed to refinance and banks were unable to handle the crush of applications. Banks kept rates high in order to increase their profitability and slow down the demand to a more manageable level. This should level out over time as rates settle in for the long term at much lower rates.
Where do we go from here?
With Coronavirus surging throughout the country, the markets are reacting by taking “defensive” positions and buying treasuries. Furthermore, at the end of the current presidency it doesn’t look like there will be a breakthrough on stimulus which will limit supply. Both of these actions will cause 10-year treasuries to increase and rates to fall (remember rates move in inverse). With all the economic uncertainty, rates could fall a little more reaching to around 2.5% on the 30-year fixed. I’m already seeing 15 year fixed rates close to 2%.
Should you lock?
We have 60 to 90 days of big economic uncertainty with the virus raging throughout the country. Rates are pretty close to a bottom but I don’t think they are there yet. Refi activity should slow down a bit as so many people just refinanced so December or January might be the ideal time. Once Mr. Biden takes office there will be some unknowns for example will the republicans hold the senate reducing the odds of big spending?
We are experiencing interesting times as a result of the first pandemic in modern times. Ultimately markets will adapt to the new paradigm but in the interim, there will be quite a few drastic swings in the market. Now is the time to sit back and wait for the markets to settle into a more normal pattern, mortgage rates will ultimately fall a little from where they are now but you might only have a short window to take advantage of the historically low rates.
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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine, The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
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