Interest Rates Hit All-Time Lows: Scare Tactics in 3…2…1…

Various sources are reporting that mortgage rates have fallen to their lowest point ever this week, with the average 30-year fixed-rate loan priced at a paltry 4.69%.

Of course, you know what that means… As soon as rates start to climb a few tenths of a percentage point, we will no doubt be subjected to a barrage of scare tactic articles like the one we thoroughly mocked back in April that boldly declared “the era of record-low mortgage rates is over.”

For some context on just how low rates are, and more importantly how low they will still be even if they go up two full points, here’s a chart of mortgage rates through 1971 via the Federal Reserve.

Weekly Conventional Mortgage Rates

Since 1971, rates have been above nine percent 39% of the time. They have been above eight percent 55% of the time. They have been above seven percent 74% of the time, and above six percent a staggering 89% of the time. In other words, even when rates eventually do rise a few points, they will still be “at historic lows.”

I’d also like to make a quick observation about why rates are still this low. Consider the basic economics of supply and demand. The price of a good (in this case, borrowed money) tends to be high when supply is low and demand is high and the price tends to be low when supply is high and demand is low.

When the government got out of the business of buying mortgage-backed-securities a few months ago, everyone was thinking that the price of borrowed money would go up due to a contraction in the supply. Rates did tick up slightly for a while, but have since fallen to these new all-time lows.

Since supply is still fairly low (banks not super excited to lend), it must be a reduction in demand that is driving rates down. Incidentally, that reasoning happens to be backed up by the recent data on post-tax-credit sales (falling through the floor).

Thus, I suggest that mortgage rates are likely to remain quite low until homebuying demand begins to pick back up in earnest, which I’m betting won’t be until sometime next year at the earliest.


About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.

40 comments:

  1. 1
    ray pepper says:

    I can practically hear the Steve Tytler commercials now about these rates………….Actually this slow down will result in a loss in revenues and hopefully his lower advertising budget will keep him off Dori Monson 97.3.

    Everytime I hear his commercials I get bound up like a rubberband ball in my stomache. Same feeling after eating popcorn…..

  2. 2
    Scotsman says:

    That’s one of a series of dramatic graphs showing the 30 year impact of government influence on fiscal policy. As the economy naturally slowed with the end of the WW2 rebuilding and Vietnam/Cold War efforts, the government opted to keep things rolling along by continually easing interest rates to drive expansion, not just in home ownership but in the economy at large. When inflation is taken into account the real or effective rates have fallen even faster and are really lower than shown. The problem is that the policies chosen have built a huge distortion into the economy, one expression of which is the now collapsing housing bubble.

    Given that you can’t raise rates without bringing the economy to a standstill, and there isn’t much room left to lower them, what can we do to both correct the distortions and keep the economy stable? The answer is we’ve entered an impossible situation where the closer we get to zero, the fewer options we have. The good news for home buyers is rates will probably not start up for some time- perhaps years. The bad news is any asset purchased will also be declining in value, so even with low rates you will probably be put into a losing position.

    It’s as though we are trying to climb a hill in an old truck. The gas pedal has been getting to closer to the floor for some time, and now it’s as far down as it can go. Unfortunately the truck is still slowing down, the top of the hill isn’t in sight, and just to keep it interesting the engine is starting to sputter and cough. We need AAA for the economy.

  3. 3
    Sniglet says:

    Tim’s chart does a superb job of demonstrating that there is no correlation to the direction of real-estate prices and mortgage rates. All those people who have been hoping for low rates in order to stimulate the market are certainly seeing the rates they want, but the follow-through with demand just isn’t happening.

    Like I’ve said ad-nausem, we may see considerably lower rates than even these currently low rates over the next few years, but I fear that it won’t do much to chear anyone up. Low rates don’t help much when unemployment is rising, credit is contracting, and loan qualifications are tightening.

    By the way, I don’t see how someone could look at what’s happening to interest rates and still believe that massive inflation is just around the corner.

  4. 4

    The Tim wrote: “Since supply is still fairly low (banks not super excited to lend), it must be a reduction in demand that is driving rates down.”

    I’m not sure you’re looking at the right supply. I would guess a lot of this has to do with international events.

  5. 5
    hp says:

    IMHO, your assertion is incorrect. The rates are actually inverse of the demand for Mortgage backed securities. The more people “demand” MBS, the rates go down as the perceived risk is lower when people want more of such securities. The reason for rates going down is there is “more demand” for US securities including MBS because of the European crisis as US is considered the lesser of the two evils!

  6. 6
    SummitSeeker says:

    By Kary L. Krismer @ 4:

    The Tim wrote: “Since supply is still fairly low (banks not super excited to lend), it must be a reduction in demand that is driving rates down.”

    I’m not sure you’re looking at the right supply. I would guess a lot of this has to do with international events.

    Ding Ding Ding, we have a winner. Saying mortgage rates move with the demand for mortgages is a massive oversimplification. Mortgage rates = 10-year treasury bond yield + risk spread premium. The risk spread premium is (usually) small, so mortgage rates are really a reflection of the demand for US Treasuries, not housing. Perceived risk in the international investment scene drives scared investors to US Treasuries, driving down the yield and taking mortgage rates down with them.

  7. 7

    Call me confused here. I’d heard that if interest rates do rise, it will be met with lower house prices. And that it’s better to buy a house with a lower price at high interest rates than a higher priced house at low interest rates because if rates fall later on you can always refinance.
    So at the moment interest rates are falling and home prices, at least in the Seattle area, are pretty flat. I know that they’ve been going up in some parts of the US, places that were just decimated by price drops in the last few years, much more so than Seattle.
    I see three ways to stimulate home sales:

    1. Lower interest rates.
    This doesn’t seem to be working real well. It just doesn’t seem possible that they can get much lower than they are now, but I’ve been wrong before.

    2. Lower home prices.
    In some parts of the United States, monthly mortgage payments on a home are lower or the same as the rent for an identical home. Generally, these are places with a not a whole lot of demand and lots of space/empty houses available. But it used to be that way in Seattle, and I think it was like that until around the mid 90’s.
    Still seems a bit out of whack in the Seattle area, and either rents will rise to narrow that gap, or home prices will drop….and rents aren’t rising. There are still a lot of foreclosures and short sales out there, and there remains ” shadow inventory”, houses that the bank foreclosed on but haven’t put on the market. They’re holding bank maybe because they don’t want to flood the market amd create lower home prices, and they’re hoping for higher home prices. But they’ve got to maintain and pay taxes on these homes. At some point, they won’t be able to keep collecting these homes and spending money on them, while getting no income in return.
    I just can’t see Seattle area home prices going up in the near term, and they have the potential to go down a bit.

    3.Create demand by having more good paying jobs or having a ” wealthy person’s relocation program” to the Seattle area..Seems to me that wherever there are a concentration of wealthy folks, it kind of sets the standard on house prices for everyone else, so San Francisco, Seattle, LA, NYC, etc have enough wealthy folks to make houses out of reach for a lot of average Joes.

    Seattle’s already pretty good at that.

  8. 8
    Matthew says:

    The housing picture looks even bleaker when you consider the fact that this is the first time in the history of the country that we have had declining house prices at the same time as declining interest rates…

    What does that mean for the “recovery” once rates start going up??

    KA-BOOM. If you ask me, Goldman’s 22% drop doesn’t seem outrageous at all. A 400k house will now be worth 320k? Sounds optimistic to me… What’s a 400k house worth with interest rates at 7 or 8 percent?

  9. 9
    anonymous says:

    Don’t forget that mortgage interest rates tend to be pegged to the market’s expectation of inflation, which is essentially zilch right now.

  10. 10
    Brainiak says:

    Of course now is the best time to buy ever!

    http://finance.yahoo.com/tech-ticker/now%27s-the-%22absolute-best-time%22-to-buy-a-home-coldwell-banker-ceo-507986.html?tickers=XHB,,tol,len,phm,dhi,low,hd

    The best part was when the interviewer asked him if he ever said that it wasn’t a good time to buy. Or maybe it was where he blamed all the lenders (agents had nothing to do with it).

    Maybe a new paradigm instead of “Buy now or be priced out forever” we should say “Sell now or be stuck forever”. I think it is kind of catchy.

  11. 11
    ray pepper says:

    RE: Brainiak @ 10

    Nice clip..Did you hear when the guy asked him if he EVER thought it was a bad time to buy…I LOVE IT!!

    If it wasn’t so tragic I would keep laughing!

  12. 12
    rational says:

    By Brainiak @ 10:

    Maybe a new paradigm instead of “Buy now or be priced out forever” we should say “Sell now or be stuck forever”. I think it is kind of catchy.

    Bull markets and bear markets are mirror images of each other. “Sell now or be stuck forever” is the mirror image of “Buy now or be priced out forever”. Nice quote indeed.

    In bull markets you “climb a wall of worry” whereas in a bear market you “slide down a slope of hope”. Sellers are hanging on to hope and slowly but surely watching their homes go down in market price.

    Homeowners in Seattle are so lucky compared to places like Miami where prices are down more than 50% in some areas — and these are not tiny hamlets far from the city but neighborhoods that existed for 20+ years in the metro area. A 10% drop eats away about a year’s worth of after tax earnings where as a 50% drop practically wipes out retirement savings (assuming the homewowner had some to begin with). Very hard to deal with these kind of drops so it is much better to avoid getting into that situation in the first place.

  13. 13
    Pegasus says:

    Don’t worry…Rates are going a lot lower. We are following the road to oblivion Japanese style. The fun won’t even begin until we are at 3.5% or lower like Japan. Think how much leverage we will get to help prop up real estate prices to continue bailing out the banks. It’s all good as pfft would say. Nobody will ever be priced out again forever. They will all be priced in forever with a rotting asset.

  14. 14
    Notorious ART says:

    RE: Brainiak @ 10
    I was cracking up when I saw that….
    I’ll side with Gary Shilling’s prediction, prices will fall more.

    http://finance.yahoo.com/tech-ticker/house-prices-still-have-another-10-20-to-fall-says-gary-shilling-504808.html?tickers=%5Edji,%5Egspc,xhb,tol,kbh,%5Eixic

  15. 15
    Scotsman says:

    RE: Pegasus @ 13

    ” priced in forever ”

    I like it. It has the ring of commitment to it. Gravitas.

    Who was the comedian who said “take my wife- please!” ? Will it become: “take my house- please!” ?

  16. 16
    CCG says:

    By ray pepper @ 1:

    I can practically hear the Steve Tytler commercials now about these rates………….Actually this slow down will result in a loss in revenues and hopefully his lower advertising budget will keep him off Dori Monson 97.3.

    Everytime I hear his commercials I get bound up like a rubberband ball in my stomache. Same feeling after eating popcorn…..

    I didn’t know Claim Jumper served popcorn ;-)

  17. 17

    By Scotsman @ 15:

    RE: Pegasus @ 13

    ” priced in forever ”

    I like it. It has the ring of commitment to it. Gravitas.

    Who was the comedian who said “take my wife- please!” ? Will it become: “take my house- please!” ?

    The late great Henny Youngman.

  18. 18
    wreckingbull says:

    One thing I never hear discussed is how these rates affect those on fixed incomes, such as the elderly.

    You have someone who lived through the depression, scrimped and saved their entire life, but get a measly pittance for their deposits, as they are basically competing with the Fed. No match. The war on savers continues.

  19. 19
    anonymous says:

    RE: wreckingbull @ 18 – I think you might be confusing mortgage rates with savings account rates and the Federal Fund rate. A low federal funds rate is intended move the economy towards inflation (or today, avoid deflation), which would tend to increase mortgage and savings account rates.

  20. 20
    deejayoh says:

    By Matthew @ 8:

    The housing picture looks even bleaker when you consider the fact that this is the first time in the history of the country that we have had declining house prices at the same time as declining interest rates…

    Except for 1990-92, the second half of 1995, that hasn’t happened. much in the last 20 years.

  21. 21
    CCG says:

    By wreckingbull @ 18:

    One thing I never hear discussed is how these rates affect those on fixed incomes, such as the elderly.

    You have someone who lived through the depression, scrimped and saved their entire life, but get a measly pittance for their deposits, as they are basically competing with the Fed. No match. The war on savers continues.

    Please. The elderly and other savers would merely waste their money on frivolities like shelter, food, and transportation. Zero interest rates are needed to force that money into higher-risk markets so it can be reclaimed to help do God’s work.

    </sarcasm>

  22. 22
    wreckingbull says:

    RE: anonymous @ 19

    No confusion here.

    1. What effect has the Fed’s MBS purchase program had on mortgage rates?
    2. What effect has the Fed’s purchase of treasuries had on mortgage rates? (which generally move in lock-step with 10-year bonds)
    3. What effect has the Federal Funds Rate had on deposit rates? (regardless of their intentions) In 2007, I was getting 5% on a savings account.

    The message from the Fed is clear: Money is not for saving.

  23. 23
    David Losh says:

    Maybe one of you brainiaks can explain the low interest rates to me. It makes no sense. Japan has had the low rates for decades and they just had the fifteenth straight month of declining consumer prices. So it appears to me that the theory of lower rates doesn’t work.

    I’m still not getting why the Fed, the United States government, doesn’t just tell banks to clean up their books, raise rates, and be done with it. It makes no sense to me that the Federal Government is propping up Real Estate prices.

    OK, I do understand the theories. Yes, the Great Depression was a terrible thing, mistakes were made, but we should have learned.

    What the federal government needs to do is announce an austerity program to reduce the deficit, and encourage citizens to do the same.

  24. 24
    corncob says:

    RE: David Losh @ 23 – You are operating under incorrect, idealistic assumptions is why. The government is partially owned by the banks, who are a strong central part of the corporate oligarchy, and therefore they don’t want to “solve” the problem as you see. The problem they are trying to solve is how to keep those banks in power and generating wealth for themselves. The depression is a nice canard, like terrorists taking away your freedoms, therefore we should take away your freedoms to safeguard them for you. The government will, again, not lower deficit spending either. We see the problem as: the government needs to stop spending so many tax dollars down a hole and digging us deeper. The government sees the problem as: lets borrow more so that we can give even more of it to corporations. They are solving that problem and doing quite well at it. Defense spending is a prime example of this, people see the problem as the war in Iraq or Afghanistan or where ever is next and want to stop that problem. The government sees the problem as how can we give more money to defense contractors, who are perhaps the largest part of the corporate oligarchy and perhaps even more powerful than the banks. Once you realize you are looking at the wrong problems you can see why their solutions never work: they are not solving the problem you think they are.

  25. 25
    Scotsman says:

    RE: corncob @ 24

    “they are not solving the problem you think they are”

    Which is why the people need to rise up and give them a “new” problem to solve, i.e. serving the people who elect them. It can be done, but I’m not sure we have an interested or educated enough population to force such change. Too many don’t know or don’t care, and too many are on the receiving end of the bribes/entitlements that have been handed out to placate the masses. How’s that for a leftist rant?

    Wonder what Krugman thinks about all this.

  26. 26
    per_se says:

    RE: David Losh @ 23 – I’ll probably butcher or get some of this wrong but to explain it simply, the theory behind monetary policy is based on the control of the lending rate (interest rates to bank) and/or the supply of money. The primary goal for a central bank (e.g. The Fed) is typically to stabilize the economy. Normally this means raising interest rates during times of expansion to control inflation and decreasing the interest rate during a recession to increase the amount of available money and discourage saving and encourage lending. This is assumed to lead to more spending and capital investments by businesses that will then cause the economy to grow.

    Contrary to what many people believe the mortgage rate is not directly tied to the Fed Rate, thus why it fluctuates so much. The Fed Rate specifically has to do with the rate the Fed charges banks to borrow money on overnight debt.

    Mortgage rates are actually based on long term securities like 10 year Treasure Notes and 30 year Treasury bonds. Simply put, treasury securities are about the least risky and most liquid investment that can be made. Therefore in order for a bank to want to lend money the rate on mortgages needs to be more attractive because of the added risks.

    So mortgage rate = yield on treasury securities + debt and interest rate risk + liquidity risk(whether and how quickly you’ll be able to sell)

    The reason mortgage rates are so low right now is that the markets are bullish about growth and there is a large amount of risk still out there. So people are funneling money into US securities. The demand for US securities causes the yield on them to decrease. The government has also demonstrated that they are willing to bail out and back up Fannie and Freddie removing a lot of liquidity risk.

  27. 27
    David Losh says:

    Alright, well what I’m saying is that theory aside raising interest rates would level the playing field. My business is cash. Small business is usually cash, and if it isn’t it should be. If we raise the cost of money, those that depend on it the most add an expense. Those closer to a cash basis rise.

  28. 28
    pfft says:

    By deejayoh @ 20:

    By Matthew @ 8:

    The housing picture looks even bleaker when you consider the fact that this is the first time in the history of the country that we have had declining house prices at the same time as declining interest rates…

    Except for 1990-92, the second half of 1995, that hasn’t happened. much in the last 20 years.

    in the last 20 years there has only been two housing drops. one in the early 90s and now.

    I don’t get the point…

  29. 29
    pfft says:

    By wreckingbull @ 18:

    One thing I never hear discussed is how these rates affect those on fixed incomes, such as the elderly.

    You have someone who lived through the depression, scrimped and saved their entire life, but get a measly pittance for their deposits, as they are basically competing with the Fed. No match. The war on savers continues.

    there isn’t a whole lot of demand for money. remember the economy is a wreck? we just had deflation so rates weren’t as low as thought.

  30. 30
    pfft says:

    By Scotsman @ 25:

    RE: corncob @ 24

    “they are not solving the problem you think they are”

    Which is why the people need to rise up and give them a “new” problem to solve, i.e. serving the people who elect them. It can be done, but I’m not sure we have an interested or educated enough population to force such change. Too many don’t know or don’t care, and too many are on the receiving end of the bribes/entitlements that have been handed out to placate the masses. How’s that for a leftist rant?

    Wonder what Krugman thinks about all this.

    would you rather have a job or a slightly lower national debt. the question doesn’t even need answering.

  31. 31
    Scotsman says:

    RE: pfft @ 30

    News Flash!! Arizona is no longer on the boarder with Mexico- it has been moved to some northern location! Here is a question that does need answering: how can we hope to recover our freedom when folks like this are left in charge?

    Fat and stupid is no way to go through life…

    http://www.youtube.com/watch?v=B-VMMweYcd8

  32. 32
    Ross Jordan says:

    By per_se @ 26:

    RE: David Losh @ 23 […] The primary goal for a central bank (e.g. The Fed) is typically to stabilize the economy. […]

    The federal reserve has two legislated goals: price stability and “full” employment.

    http://www.law.cornell.edu/uscode/html/uscode12/usc_sec_12_00000225—a000-.html:
    The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.

    That dual (and conflicting) mandate of the federal reserve is different from most central banks.

  33. 33
    softwarengineer says:

    RE: Ira Sacharoff @ 7

    Problems With Your Assumptions Ira

    You assume Seattle can bring in high waged folks in 2010. The problem is, that’s not happenning. Both Boeing and M/S are flat or reducing employment since 2009. Overall, job degradation in Washington St is worsening, not getting better….especially construction.

    http://crosscut.com/2010/01/22/econ-finance/19528/A–dismal-decade,–with-more-to-come/

    The problem with old obsolete paradigms….that’s what they are.

  34. 34
    meadows says:

    RE: ray pepper @ 1

    yer suppozed ta have beer w/that stuff….

  35. 35

    RE: softwarengineer @ 33 – Has Microsoft actually been reducing employment? I’ve been very skeptical of their goals in that area. Are there any stats that have both employee and temp employee levels for Washington?

  36. 36
    David Losh says:

    RE: Kary L. Krismer @ 35RE: Ross Jordan @ 32

    OK, Kary has mentioned that business needs credit. Some how we need credit for business. I understand equipment, it needs to pay for itself as we go along, but credit is the cost of doing business. Raising the cost of doing business doesn’t necessarily mean that’s a bad thing. As some one pointed out it might make people think before making bad decisions.

    Then Kary brought up that insurance mitigates the risk of doing business. Hmmm….

    So if large corporations speculate with credit to expand, then insure against losses, that, to me, is an unfair advantage to business as a whole. if a large corporate entity wins, they win, if they lose they are insured. Small business doesn’t operate that way.

    I had heard that it is much easier to have huge corporations create jobs, contribute to health care, pay more FICA, and absorb the costs of expansion. All of that is true, but the system is set up that way.

    My only question would be if it’s possible these incredibly low rates are bad for the economy. Does it give too much power to the whims of large companies?

  37. 37
    per_se says:

    RE: David Losh @ 36 – How many small businesses do you know of that get started on pure cash and have enough reserves and/or cash flow to not need credit? How many start-ups launch with no investors/angel funding, if you can make more in a savings account or T-bill why invest in a business?

  38. 38
    deejayoh says:

    By pfft @ 28:

    By deejayoh @ 20:

    By Matthew @ 8:

    The housing picture looks even bleaker when you consider the fact that this is the first time in the history of the country that we have had declining house prices at the same time as declining interest rates…

    Except for 1990-92, the second half of 1995, that hasn’t happened. much in the last 20 years.

    in the last 20 years there has only been two housing drops. one in the early 90s and now.

    I don’t get the point…

    nationally, prices dropped in 95 as measured by CS 10-city index. just facts

  39. 39

    RE: David Losh @ 36 – I’m not sure why you think small business doesn’t operate with credit and insurance.

  40. 40

    […] pointed this out numerous times in the past, but it is worth repeating: Rates are still crazy […]

Leave a Reply

Use your email address to sign up with Gravatar for a custom avatar.
Your email address will not be published.

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>

Please read the rules before posting a comment.