Why interest rates and mortgage rates are falling

Two weeks ago in Mortgage rates dip below 4% – again I wrote this in answer to the question about the impact on mortgage rates when the Fed does increase rates: The Fed’s move will affect short-term interest rates. As the Wall Street Journal stated this week:”Rates for fixed-rate, 30-year-mortgage loans key off the 10-year Treasury yield. So, with most observers predicting 10-year yields will remain fairly stable as the Fed begins to tighten, people with relatively good credit standing should continue to see loan rates near 4% or only a little higher.”

My point, that even if the Fed does raise rates in September – which seems less likely after the setback in world stock markets this week – the impact on mortgage rates will be limited, was reinforced by this Why are Bond Yields falling if the Fed is going to raise interest rates? Charles Schwab article.

The main points from this article are:

  • Inflation expectations are falling due to a strong dollar and collapsing commodity prices.
  • Soft global growth and low interest rates abroad make U.S. yields relatively attractive.
  • The market has already discounted tighter monetary policy.
  • Longer term expectations for economic growth are muted due to demographic trends.

10-year Treasury yield
As mentioned above the 30 year fixed rate mortgage (FRM) is priced off the 10 year Treasury (10T) yield. Over the last few years the spread – the difference between the FRM and 10T – has ranged from 1.5 – 2%. In times of uncertainty – like this last week – when there is a “flight to quality” as investors buy US Treasuries as a safe haven, the spread tends to widen because the yield on Treasuries is forced down by the buying pressure:

Sources: Freddie Mac, US Treasury

Sources: Freddie Mac, US Treasury

Sources: Freddie Mac, US Treasury

Historical mortgage rates
Owning real estate is a long-term commitment, yet we can easily get distracted by short-term considerations. Thus it is important to understand where we are compared with the past. For the last year or so mortgage rates have been in the 3.5 – 4.5% range.  The following chart shows how cheap mortgages are compared with the last 25 years:

Mortgae rates_1994_2014

Source: Freddie Mac

The biggest change in recent years has been the attempt to stave off deflation and encourage inflation. We are seeing renewed weakness in commodity prices – oil dropped to $40 a barrel this week – and there is no evidence suggesting that inflation is going to recur any time soon.

The outlook, therefore, at least for the forseeable future, is for mortgage rates to remain at or below 4%.

If you – or somebody you know – are considering buying or selling a home and have questions about the market and/or current home prices, feel free to contact me on 617.834.8205 or Andrew.Oliver@SothebysRealty.com.

Read Which broker should sell my house?

Andrew Oliver is a Realtor with Harborside Sotheby’s International Realty. Each Office Is Independently Owned and Operated

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