How Long Will Low Mortgage Interest Rates Last?
In 1987 I purchased my first home in Cedar Hills and I felt fortunate to lock in my interest rate at 10.5% for 30 years. It was truly considered an excellent rate for the time as rates in the early eighties were as high as 20%. Fast forward to today and we all have been spoiled to think that any rate above 7% is high.
Currently rates on 30 year conforming mortgages are a ridiculously low 4.875%, and homes are not flying off the shelves. While many factors influence home sales, we have become numb to the single biggest factor, the rate in which we can borrow money. We all seem to believe 5% will be around forever.
In thinking about this, it reminded me of some basic paradigms I recall learning about regarding the way the stock market affects mortgage rates. Generally speaking, if the stock market is booming, investors move their money from mortgage backed bonds into other investment vehicles where they believe they will receive a higher return on their investment. As a result lending institutions will typically pay a higher yield to encourage the investors to continue investing into mortgage backed bonds. Once this occurs, mortgage rates increase.
This brings us to today. The stock market has been booming as of late and yet, interest rates have been stable at 4.875%. Why? The US government is buying mortgage backed bonds to temporarily freeze rates at these historically low levels, hoping to stabilize the housing market; and the program has been working. However, all good things come to an end and the government will be phasing out this program in 6 months at the end of the first quarter of 2010. This means we will be back to a “free” market next year and all indicators have been suggesting that a healthy free market business economy cannot survive with interest rates this low.
So, if you are thinking about making a change for the long run, and would like to lock into a sub 5% 30 year mortgage, then the next 6 months may be the time to make your move. If you combine this with nice inventory to choose from at prices that in many cases are down more than 20% from their 2006-2007 highs. The time may be right. On the other side of the coin, if you are a near term seller, and the government stops subsidizing the bond market next spring, selling your home now maybe the better moved with today’s attractive low rates.