Mortgage rates are doing something we haven't seen since the financial crisis. But this spooky echo to 2009 won't cripple the housing market.
Treasury bond yields and mortgage rates typically move in tandem, but the gap between them has ballooned to its widest point since 2009. That’s an eerie parallel to the Great Recession. But don’t expect it to stop the housing market from snapping back quickly.
The coronavirus pandemic has damaged the global economy. This has driven a massive amount of investment capital toward the relative safety of U.S. Treasuries, whose yields fall as prices rise.
That should be causing a comparable decline in mortgage rates. Rick Sharga, president and CEO of CJ Patrick Company, explains:
The interest rate on the 30-year fixed-rate mortgage tends to move up and down in tandem with these yields. And these yields are currently near their lowest levels in history.
While mortgage rates have fallen, there is a large spread between the cost of borrowing from the U.S. government and the rates offered to homeowners.
Normally, 10-year U.S. Treasuries set the tone for 30-year mortgages, but the spread between them is now 2.9 percentage points, close to levels last seen in late 2008 and early 2009.
Over the past five years, the gap has averaged closer to 1.74. So based on Treasury yields, mortgage rates should be even lower than they are today.
Optimal Blue LLC says consumers could see rates as low as 2.25% on traditional 30-year government-backed mortgages if markets behaved normally. Yet Bankrate.com posted average rates above 3.5% on Tuesday.
Despite the wide gap between mortgage rates and Treasury yields, house-hunters may not care. With rates as low as they already are, it’s unlikely this particular cost is pricing too many would-be buyers out of the market.
Plus, the gap could begin to close soon. Analysts believe mortgage rates will continue to drop and could go lower than 3% through 2021.
There’s a significantly lower demand for loans, declining inflation, and 10-year Treasury Notes approaching zero. These factors will cause rates to decrease. The economy has taken its hardest hit in decades. And the prognosis for a significant recovery post-COVID-19 is weak.
If the average 30-year rate breaks records and falls below 3%, it will create a solid buying and refinancing environment throughout the year. Before 2020, the lowest rate recorded for a 30-year fixed-rate mortgage was 3.31%, reached at the end of 2012.
In March 2020, this mark was briefly beaten when rates fell to 3.29%. Fannie Mae and Wells Fargo recently predicted that rates would reach about 2.9% this year or next.
Real estate should become attractive again when the virus panic subsides and more states restart their economies. Lower mortgage rates will likely encourage people to buy a home or refinance. But whether or not they do may depend on the economy.
Real estate bears allege that the housing market recovery might not be as strong as expected. Record unemployment and a single-family home supply shock threaten to create lingering headwinds for buyers and sellers alike.
Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com.
This article was edited by Josiah Wilmoth.