Could Mortgage Rates Possibly Fall Any Lower?
One of 2020’s bright spots—a year marred by a pandemic, economic recession, social unrest, wildfires, hurricanes and a polarized presidential election—has been rock-bottom mortgage rates.
Mortgage rates have been tumbling since COVID-19 disrupted the nation's economy, achieving what many experts had believed was impossible: rates below 3%.
These historically low rates have allowed buyers to stretch their budgets at a time when home prices are on the rise. Homeowners who refinance could shave $100 or more off their monthly mortgage payments, potentially saving tens of thousands of dollars over the lives of their loans.
COULD RATES POSSIBLY FALL EVEN FURTHER?
"That's the big question,” says Len Kiefer, Freddie Mac's deputy chief economist. "The honest answer is, we don't know.” Economists have not had much luck in forecasting where rates will go. We haven’t experienced a pandemic in our lifetimes, and this recession is driven by a virus, not a housing bubble or oil crisis or other economic malaise.
"Technically speaking, mortgage rates could go lower. Theoretically, they could drop to around 2%," says real estate economist George Ratiu. "However, for lenders, who set their own rates, the likelihood of rates going much lower is pretty slim. They don't want to risk getting a lower rate over the length of a loan."
That's what happened in March. Rates fell to around 3.3% in response to the coronavirus-induced upheaval in the financial markets, and homeowners rushed to refinance their existing mortgages. Lenders were so overwhelmed by the surge in business that they raised their rates to temporarily keep new refinances at bay as they scrambled to catch up. Refinances have since slowed to more manageable levels, and rates have fallen.
WHAT COULD MAKE THEM FALL FURTHER?
For buyers, lower rates could offset home prices, which have jumped 11% year over year. Those low rates can bring previously unattainable homes within reach, so buyers are watching eagerly to see which direction rates will go in.
“If we were to see the economy struggle a bit, that might cause rates to decline," says Kiefer. "If the economy is stronger than we expected, they might rise a little faster.”
See, rates are mostly determined by investors. Lenders don't want to hold on to the mortgage loans they make; they want to free up capital to make new loans and profit off those. So they bundle their mortgages and sell them to investors on the secondary market.
When financial markets are all over the place, investors often pull money out of stocks and pump it into the relative safety of treasury and mortgage bonds, which are considered to be safer long-term investments. Mortgage rates are tied to the 10-year US Treasury bond market, so when the bond market is strong, mortgage rates fall. For now, the federal government has committed to buying up mortgage securities in order to stabilize the market in the face of this economic downturn. That's led to a surge in demand, which also pushes rates down.
"Investors are clamoring for mortgage bonds because a weak economy and volatile stock market make a lot of conservative investors nervous," says Ratiu. "Bond investors are attracted to mortgage bonds, because the real estate market recovery is stronger than the rest of the economy.”
Kiefer points out that rates have typically fallen by about 2% a decade. They were around 4% in the 2010s, so if the pattern continues they will fall further into the low 2% range. But he believes rates might stay where they are, or fall just a little more, maybe into the 2.75% range.
“If you’re in the market to refinance or purchase a home, please know that rates can move very quickly," says Kiefer. "The rate you see this week could be very different from the rate you see next week. There’s a lot of room for rates to move.”
That means buyers and those seeking to refinance need to have a understand what the numbers mean for them. “You could wait for a basis-point lower, but you have to weigh the tradeoffs given fast-rising home prices," says Ratiu. "At this point, waiting for a lower rate will probably have little benefit.”
Christy Rosen Clement is a Pricing Strategy Advisor®, Seller Representative Specialist®, Military Relocation Professional® and REALTOR® at Palermo Real Estate Professionals in South Tampa
