Making Sense Of The Headlines: How Long Will Interest Rates Stay Low?

There’s an overwhelming amount of data and headlines circulating. This column is my attempt to make sense of it all for you, the real estate professional, from an overall economic standpoint.

A couple of months ago, I recorded a video to share my thoughts on conventional mortgage rates at a time when COVID-19 had started hitting the U.S. economy and we were seeing some massive swings in both mortgage and Treasury rates over a very short period of time.

Well, things have settled down a little since then, so I thought it would be a good time to revisit the topic and give you, hopefully, a clearer view as to where I see mortgage rates moving for the rest of this year — plus, my long-term forecast for 2021.

So, what’s been happening since we last took a look at rates?

Well, they really haven’t moved that much. When I last spoke to you, they were averaging about 3.3 percent, and they are now at 3.15 percent. Hardly exciting! But it did tell me that the Federal Reserve was successful when it decided to step in to support the U.S. economy as COVID-19 was ramping up.

But the question now becomes how much further down the rabbit hole of supporting the economy and housing is the Fed prepared to go?

As I was thinking about this, I took a look at the Fed’s balance sheet, and the figures are staggering. Today, the Fed holds about $4 trillion in bonds and $1.8 trillion in mortgage-backed securities. Their post-COVID-19 shopping spree has been aggressive, having purchased about $460 billion of mortgage-backed securities since the middle of March in support of both the economy and mortgage markets. 

But I looked at the last 10-year Treasury auction, and although the Fed purchased about $35 billion worth of 10-year paper, that was down from the $40 billion they spent at the prior auction.

So this begs the question as to whether this is a sign that they will continue to limit their purchases and, if so, what will this mean for mortgage rates?

As many of you will know, mortgage rates are heavily influenced by the interest rate on government securities with 30-year rates tracking the 10-year Treasury rate remarkably closely — or it did, but I’ll get to that part shortly.

You know that I do like to offer a little perspective when I share my thoughts with you, so let’s take a quick look back in history and how mortgage rates have moved over time.

The chart in today’s video shows conforming 30-year fixed-rate mortgages going all the way back to when they first came in being back in the mid-1970’s.

First off, I need tip my hat to my colleague Leonard Kiefer over at Freddie Mac who first came up with looking at rates this way. I think that it tells a great story.

You can clearly see the trajectory of rates over time with a peak at just below 20 percent back in the ’80s followed by a downward trend all the way to the 2020 average of 3.5 percent. It’s a truly remarkable drop in borrowing cost.

What can we expect for…