Interest rates can drop as low as 2.25%

After falling at the end of last week, rates are on the rebound again with the 30-year fixed rate mortgage increasing by 2 basis points to settle at 2.92%, while the 15-year mortgage dropped 3 basis points to settle at 2.53%

current outlook:

Congress struggles to put together a new stimulus bill that will determine the fates of public schools, small businesses, and millions of unemployed workers in time for the end-of-month deadline. While the Republicans put forth the HEALS act for consideration Monday evening, their $1 trillion package may be too far removed from the Democrats’ $3 trillion plan for any compromise to be had. This has led to predictions that the Congressional recess will be delayed. Meanwhile, the Federal Reserve is slated to make an announcement later today, which will include their assessment of the economy and any plans they have to address it.

interest rates could fall as low as 2.25%

Delinquency Rates Experience Déjà Vu

While we were approaching a mini-recovery in June, this quickly changed with an influx of new COVID-19 cases that delayed or reversed reopening plans. As a result, data that had just started to turn favorable may soon be seeing a reversal, including unemployment, retail sales, consumer confidence, and mortgage delinquency rates. In June, only 6.79% of mortgages were in some kind of payment relief program, coming down from a high of 7.484% in May. In fact, things had improved to the extent that mortgage delinquencies actually decreased year-over-year.  

However, this may change depending on Congress’ actions and our ability as a nation to “flatten the curve.” We’re already seeing shares of mortgages in forbearance decline by a smaller amount than in previous weeks. In addition, Ginnie Mae’s portfolio has already seen an increase in both loans in forbearance and borrowers requesting forbearance. This is what we would expect to happen if the economy was in crisis-mode again, “as weakness would likely impact Ginnie Mae’s portfolio first,” according to Mike Fratantoni, MBA’s Chief Economist, since its portfolio consists of FHA and VA loans. 

Are Mortgage Rates Playing Limbo? (i.e. How Low Can They Go?)

Do mortgage rates have a floor? And if so, is this floor 0% like the Federal Funds Rate? The short answer is yes they do, and no it’s not. To elaborate, how low mortgage rates can go is more dependent on what yield (or interest rate) investors are willing to accept than on the Federal Funds Rate, which has more to do with what interest rate banks borrow money at. In case you didn’t know, lenders rarely hold onto the original mortgage, choosing instead to bundle and sell these loans as mortgage bonds to investors. Currently, the lowest, actively-traded mortgages have interest rates no lower than 2.25%. Anything lower than that will face resistance from the market and be difficult to sell. 

In short, because mortgages are based on the mutual benefit of both homeowners and investors, it’s more like rates are playing tug-of-war than limbo. And while consumers and the financial hardships experienced by them have pulled rates down, investors and their need to turn a profit are keeping rates from sinking too much too soon.

Low Rates → Affordable Houses → High Competition

Low interest rates often counteract increases in housing prices, resulting in more affordable housing. This is evident in the NAHB’s Housing Trends Report for Q2 of 2020. The number of prospective buyers who could afford at least half the homes in their market increased by 4% from last year. The number of people who left the market because they could not find an affordable house also decreased, dropping from 50% last year to 39% this quarter. 

However, there is still plenty of room for improvement. Only 24% of total buyers were able to afford more than half the available homes. This is consistent across buyers of every generation and buyers from every region. Despite this limitation, buyers continue to be drawn in by low rates. As of this report, 49% of buyers have moved from passive planning to actively looking for a home. This has led to increased competition, with 29% reporting getting outbid. It’s also led to more and more people choosing homeownership over renting, with the U.S. homeownership rate increasing for the fourth straight quarter to 67.9% while the number of renters decreased by 7.2%.* 

*This number may be inflated due to errors in data collection by the U.S. Census Bureau as a result of COVID-19.

"Mortgage rates are the icing on the cake for households that were thinking about buying. They found an unexpected opportunity during the worst economic downturn America has seen since the Great Depression."

RALPH MCLAUGHLIN, Chief Economist of Haus
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