RTC Mortgage Blog

How Long Will These Low Rates Last?

September 4th, 2014 2:25 PM by Richard T. Cirelli

How Long Will These Low Mortgage Rates Last?

Mortgage rates are at their lowest point in over a year! Why did rates move in the opposite direction from the higher-rate expectations? 

Mortgage rates are driven by movements in financial markets--most directly by MBS (Mortgage-Backed-Securities, which dictate how much mortgage debt is worth to investors).  MBS are always trading with some level of correlation to broader bond markets such as the 10-Year Treasuries which are the most watched indicator of mortgage rates. 

As is always the case when it comes to financial markets, there's rarely ever a single answer that explains why things are the way they are.  This is certainly true of the current situation with mortgage rates.  However, if we look for one predominant answer to the lower-rate question, the only obvious answer would be “Europe”.

The European markets have taken US markets on several wild rides since 2010.  This came to a head in 2012 with the 2nd Greek debt crisis.  That wasn't just about Greece though.  Because the European countries share a common currency, if Greece defaulted on its obligations, it would affect the currency’s value, making it significantly more likely that the next weakest country would share a similar fate.  From there, the domino effect would affect the global economy.

That Greek drama coincided with the US monetary policy where markets saw the Fed's only two choices as "hold steady" or "more easing."  “Quantitative Easing” (QE) and other easy money policies were at no risk of being reversed.  Treasuries hit all-time lows and Mortgage rates fell into the low 3's. QE is the Fed’s commitment to buy up to $85 Billion each month in US Treasury’s and Mortgage-Backed Securities. The amount of their purchases at this level continued for a few years but is now being phased out and is expected to be eliminated completely in October.

After the markets adjusted to the Fed’s decision to taper their Treasury and MBS purchases, there was no reason for rates to move in either direction until another catalyst came along.  The catalyst was news that the European Central Bank (ECB) had begun talking about their own Quantitative Easing program. 

Europe hasn't started their own QE yet but they are serious about it.  This has created momentum buying in global rates. The benchmark European 10yr government debt is currently trading around 0.94%!  Compare that to US 10yr Treasuries at 2.40%!  As you see, US investments are more attractive than Europe’s and as investors buy US Treasuries and MBS, the price goes up and the rates come down.

To conclude, Europe is helping to keep a lid on domestic interest rates.  The turmoil in the Ukraine has helped too. Until something changes about the situation in Europe, it would be very hard for rates to move significantly higher.  At this time last year, the average rate for a 30-year fixed rate mortgage of $417,000 or less was 4.57% + .7 points. Today it’s 4.10% + .5 points according to Freddie Mac’s weekly survey.

Posted in:General
Posted by Richard T. Cirelli on September 4th, 2014 2:25 PM



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