By Nicole Rueth - August 1, 2020
Can Rates Go Lower?
I have been watching the 10 YR Treasury drop for the past year to it's current historical lows... indicating our rates "should" be even lower than they are. Mind you.. this indicator is not a forward indicator but a daily moving target, sometimes erratic in nature. Having said that, our mortgage rates on average had traveled 180 bps over the 10 YR Treasury.. so as it moved so moved mortgage rates. To show that in numbers.. the 10 YR Treasury in April 2019 was 2.41 while rates were 4%. In April 2020 the 10 YR Treasury was .61, while our 30 yr mortgage rates were 3.25%... if they followed the trend, they should have been 2.5%. This was due to lending and economic risk in addition to lenders setting rates higher in order to slow down the demand for refinance loans.
I have also been watching as the FEDs have been buying more mortgaged back securities at lower levels. They moved from buying the 3% coupon rate to the 2.5% coupon rate to now the UMBS 30 yr 2% coupon rate. What's next? a 1.5% coupon? This will try to drive rates lower as the FED yields it's power over the housing market through the most powerful way it can.. buying mortgage back securities.
There are also economic indicators that show signs of where we are headed. As you know, for the past several years I have been talking about the economic indicators used to forecast an economic recession.. such as manufacturing and shipping declines, unemployment, consumer confidence, and the inversion of the yield curve. What we did not see coming was a pandemic that created unnatural pressures on lenders and interest rates while trying to solve the issues of joblessness.
Then there's the stock market. There was a time when the stock market and interest rates were closely correlated. As people feared instability or increased risk in the market, they would move their money to the safety of bonds. That increase in demand would raise prices (much like the bidding wars in today's housing market). As prices increase, "yields" .. or our mortgage rates, go down. As of late, the stock market has been divorced from the economy. The valuation of stock prices based on a price per earnings basis right now rivals that of the Dot Com bubble.
While there is no crystal ball.. no telltale for where rates will be in a week, in a month, in a year; there are educated guesses. Based on another record, one that broke my heart, passing 150,000 deaths in the United States, we know that we have more economic unrest coming BEFORE we get to stability. This economic unrest will keep the Fed's buying Mortgage Backed Securities and a downward pressure on rates.
So where will rates go? They will go up once a viable vaccine is in place and we can all go back to work and our kids can go back to school. But between now and then, rates have the opportunity still to go lower, providing our buyers greater affordability and a lower monthly payment, and our homeowners the ability payoff higher interest debts, reduce their monthly payment and tighten up their budget.
This is an incredible time to be advocates for our clients, to be in real estate. Ultimately, rates shift daily as market news either confirms expectations or surprises the market. So let's remember, helping our clients enter into homeownership today helps them build security for their financial future. And right now, more than ever, the home is a safe place, one that should provide joy, peace, and stability.