Why Are Mortgage Rates At Historical Lows?

Mortgage rates continued to tumble over the past week as investors fled to the safety of government bonds, pushing Treasury yields down, mortgage provider Freddie Mac said Thursday. This is no surprise given the geopolitical uncertainties buffeting economies worldwide.

Graph: Marketwatch

The 30-year fixed-rate mortgage averaged 3.72 percent in the Feb. 4 week, down from 3.79 percent from a week earlier and is at the lowest level since April 30, Freddie Mac said. The 15-year fixed-rate mortgage averaged 3.01 percent, down from 3.07 percent. The 5-year Treasury-indexed hybrid adjustable-rate mortgage averaged 2.85 percent, down 5 basis points.

“These declines are not what the market anticipated when the Fed raised the Federal Funds rate in December,” Freddie’s chief economist, Sean Becketti, noted in a statement. “For now, though, sub-4 percent mortgage rates are providing a longer-than-expected opportunity for mortgage borrowers to buy or refinance.”

In fact, the 30-year conforming fixed rate can currently be bought down to 3.25 percent.  This is a historical low, and causing a rise in mortgage applications.  The Refinance Index increased 0.3 percent from the previous week to its highest level since October 2015, reports the MBA. The seasonally adjusted Purchase Index decreased 7 percent from one week earlier. The unadjusted Purchase Index increased 11 percent compared with the previous week and was 17 percent higher than the same week one year ago.

But for how long can these below-historically-low rates continue?  Too much oil, for one, should help to keep oil prices, and therefore inflation, almost non-existent for this year, at least.  That’s according to Barron’s resident economist Gene Epstein.  “…over the past five years,” says Epstein, “the world has found a trillion extra barrels of oil—the equivalent of 30 years of extra supply—with a third of it coming from shale, a third from deep water, and a third from oil sands. Over the past year, the costs of recovery from these sources has noticeably fallen. A return to triple-digit prices on crude oil is (therefore) unlikely for the foreseeable future.” 

 Graph: Barron’s

            But there’s another reason for such low interest rates.  Growth is slowing worldwide, which is the major reason inflation is so low.  And Janet Yellen is now backtracking on raising the Fed’s rates any higher this year.

            But consumers don’t seem to be listening to the bad news. Consumer spending — the main engine of the U.S. economy — rose 3.1 percent in 2015 to set the fastest pace since 2005. Unless Americans suddenly turn pessimistic, they’ll keep spending at a decent clip this year and give businesses no reason to resort to mass layoffs.

One major bellwether is car sales, says Marketwatch’s Jeffry Bartash. After snapping up a record 17.5 million new vehicles in 2015, Americans were back at it in January. Sales rose last month rose at the same robust 17.5 million pace. “That’s not a sign of an increasingly anxious consumer.”

Harlan Green © 2016

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen