Have we entered a new mortgage financing era, a time when rates are largely stable and only move within a small band for years to come?
There’s an argument to be made that long-term rate stability is being embraced. Borrowers don’t want higher rates, lenders don’t want lower rates, the Fed seems unlikely to move rates much in any direction, the Bank of England is considering negative interest levels, and the government is trying to raise new tax money regardless of what happens.
“Mortgage rates have been trending downward since the 1980s” explained Rick Sharga, Executive Vice President with RealtyTrac, a leading source of investor leads and real estate data. “According to Freddie Mac, the average mortgage rate in 1981 was 16.04%. In 2019 the average was just 3.94%. The record low annual average was 3.65% in 2016.
“If the financial tea leaves are right,” said Sharga, “cheap mortgage rates are here now and likely to be with us for a very long time. If this is correct it means that qualified real estate investors will have ongoing access to low-cost financing for the next few years.”
The idea is not that mortgage rates will be set in concrete, but instead that they will largely move within the 2% range. Here’s why:
The Federal Reserve
Right now the federal funds rate, the rate banks pay for overnight lending, ranges from 0.00% to 0.25%. The Federal Reserve can move this rate up or down to help control inflation. Fed Chairman Jerome Powell said in August that a strong labor market has not triggered inflation so maybe lower interest rates are okay, something not to be fought by the Fed in an effort to hold inflation to the 2% level it has historically preferred.
“In emphasizing the importance of a strong labor market and saying the Fed will tolerate slightly faster price gains,” wrote Jeanna Smialek in The New York Times, “Mr. Powell and his colleagues laid the groundwork for years of low interest rates. That could translate into long periods of cheap mortgages and business loans that foster strong demand and a solid job market.”
“In effect,” explained Peter Warden, writing for TheMortgageReports.com, “the Fed has signaled that it won’t be tightening monetary policy for a long time, because economic recovery will be so uncertain post-COVID.
“So interest rates are likely to stay low, probably for years.
“And that should apply to mortgage rates, too.”
The Bank of England
What goes on overseas can impact US mortgage rates by sending more – or less – cash to our shores.
For instance, the Bank of England just published the minutes for the mid-September meeting of its Monetary Policy Committee (MPC), the general equivalent of the Federal Reserve’s Federal Open Market Committee (FOMC). Toward the end was this bombshell.
“The Committee had discussed its policy toolkit, and the effectiveness of negative policy rates in particular, in the August Monetary Policy Report, in light of the decline in global equilibrium interest rates over a number of years. Subsequently, the MPC had been briefed on the Bank of England’s plans to explore how a negative Bank Rate could be implemented effectively, should the outlook for inflation and output warrant it at some point during this period of low equilibrium rates. The Bank of England and the Prudential Regulation Authority will begin structured engagement on the operational considerations in 2020 Q4.”
Translation: The Bank of England (BOE) is not promising negative interest rates in October, the start of the fourth quarter. But it’s not ruling them out and that — by itself — is some very new thinking.
Money moves worldwide at electronic speed. If the Bank of England is dropping rates maybe some investors will move their cash to the US. More cash here means more supply and that can help maintain today’s rates – or push them down.
The Federal Housing Finance Agency (FHFA)
The federal government announced in mid-August that it would begin chargings a .5% “adverse market refinance fee” beginning September 1st for loans sold to Fannie Mae and Freddie Mac. Mortgage rates instantly shot up, including rates for purchase money mortgages, financing unaffected by the new charge.
Associations representing lenders, real estate brokers, builders, and virtually everyone else connected with the housing sector instantly objected. There was too little time to implement the new charge, borrowers with applications now being processed would face suddenly higher rates, and – oh by the way – why is such a fee necessary? The government backed down, said the new fee will be delayed until December 1st and will only apply to refinancing of $125,000 or more
The purpose of the charge, according to the Federal Housing Finance Agency (FHFA), is to raise $6 billion for Fannie Mae and Freddie Mac reserves. That may sound logical but the government, according to ProPublica, has already taken nearly $110 billion in profits from the two companies since it placed them in a 2008 conservatorship. That’s cash that could have been held in reserve by Fannie Mae and Freddie Mac.
The adverse mortgage refinancing fee is scheduled to start December 1st but Congressional action can scuttle the new charge. Or, rather than raising mortgage rates, the government can simply drop the adverse market refinancing fee and return a small portion of the money already taken from Fannie Mae and Freddie Mac.
The new charge, if it goes through, will be paid by lenders. They will pass the cost through to borrowers in the form of rates that are perhaps one-eighth to one-quarter of a percent higher. However, rates might not rise at all. It’s possible that because of market forces rates will continue falling, the new fee will be outpaced by real rate declines, and borrowers will enjoy lower interest levels despite the new charge.
Is the rate stability theory right? We don’t know yet, but it’s surely more attractive than speculation suggesting a return to far-higher financing costs.