Daily Economic Update: Mortgage Rates

Each day the Research staff takes a look at recently released economic indicators, addressing what these indicators mean for REALTORS® and their clients. Today’s update highlights mortgage rates.

• Good news: mortgage rates are at their lowest in at least 40 years.  The average 30-year fixed rate mortgage is at 4.1 percent.  Though less popular now, some who are looking for short-term adjustable rate mortgages are also hitting pay dirt at 2.8 percent.  These rates are the lowest in a generation, possibly an once-in-a-lifetime opportunity for many homebuyers.
• Bad news:  the rates could be even lower.  The 10-year U.S. Treasury yield is the benchmark rate by which mortgage rates are generally priced.  The bump up from Treasury, though never stable, has been anywhere from 120 to 180 basis points in general, with the average bump being 163 basis points in the past 20 years. That is, if the 10-year Treasury borrowing rate is 4 percent then the 30-year mortgage rate will be priced as low as 5.2 percent or possibly 5.8 percent.  Today, the 10-year Treasury is 2 percent.  That means the 30-year mortgage rate should be about 3.6 percent, and not the 4.1 percent that was being quoted last week.
• The reason for a higher than usual spread  today could be due to (1) banking regulatory uncertainty, (2) lawsuits on banks, (3) lack of competition in the banking industry, (4) some bond investors who do not completely take on full faith the credit backing by the U.S. government of Fannie and Freddie debts.
• Another piece of bad news:  even though mortgage rates could be lower, what matters more for the housing market today are not the quoted rates but rather who can get loan approvals.  Only a sliver of people are getting approved at rock-bottom mortgage rates because of excessively tight underwriting standards.  For example, on FHA loan approvals the average credit score is now close to 700, rather than the historical normal of 650.
• More bad news: consumers see record low mortgage rates in the media and advertisement.  But some consumers with less than pristine credit scores, if offered at all, are getting quotes on mortgage rates that are much higher than the ones seen in the media.  These consumers naturally feel they are getting ripped-off and no consumers would sign up for a deal where there is the perception of unfairness.
• Bottom line:  Record low rates, but very few takers.