Residential Mortgage Rates Hit Historic Low


blitt chandan1 Residential Mortgage Rates Hit Historic Low
Sam Chandan, President of Chandan Economics

In a fresh indication of the economy’s moribund state, residential mortgage rates fell to their lowest level on record last week. In its survey for Oct. 6, Freddie Mac reported that 30-year fixed mortgage rates slipped to 3.94 percent, down from 4.01 percent the prior week. Rates on 15-year mortgages fell for the fifth consecutive week, also setting a new record low of 3.28 percent.
This is the first time the benchmark 30-year rate has fallen below 4 percent since at least 1971, the year after Freddie Mac’s founding and the first year for which data are available. The average nominal rate over the 40 ensuing years is more than twice the current level. Extrapolating from long-term inflation expectations, the real rate on 30-year financing is roughly 1.4 percent.

What’s Driving Rates Down?
Owing to the government’s role in supporting domestic mortgage markets and its ambiguous guarantee of agency debt, conforming rates are tightly tied to the market for Treasuries. The connection has weakened during the last three years of Fannie Mae’s and Freddie Mac’s conservatorship, but remains a key structural element of residential financing cost trends.
Over the last 40-year period, the correlation between Treasury and mortgage rates has been near perfect, at 0.98. As mortgage rates have tracked the decline in government debt yields, their spread over the baseline 10-year Treasury has been relatively constant, in a range just above 150 basis points. Global financial market instability—stemming principally from the European debt crisis—and the dour economic outlook are among the principal factors that have pushed Treasury yields below 2 percent for most of the last month. Mortgage rates have fallen in concordance.

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On the Cusp of a Buying Spree?
All things being equal, the recovery’s improbably low financing costs should coax a large number of households out of renting and into homeownership. Similarly, existing homeowners with relatively high in-place costs of financing should be refinancing into lower rates. This textbook analysis has underpinned the selection of policy alternatives in support of the housing market thus far into the crisis.
While residential mortgage rates are supportive of housing demand, the practical reality is that mortgage application volume has not responded in kind and that qualification criteria remain elevated. Mortgage rates have been near their historic lows for several years; we should not expect that a further, marginal decline will suddenly trigger a wave of home buying activity if the binding constraints on demand are not directly related to financing costs. As concerns existing homeowners on the edge of default or foreclosure, income constraints generally place the lower mortgage rates outside of their reach.