When, if ever, will mortgage rates go back up?

October 12, 2020 by Ted Bauer

This is an interesting question that a lot of people have speculation and ideas on, because it obviously drastically impacts homebuying, and that's a major sector of the United States economy. Plus, we're currently in a Presidential year, and a lot of stuff flies around about how so-and-so candidate winning will mean insane interest/mortgage rates. Plus: many economists, over time, have not necesarily been good at predicting the rise and fall of mortgage rates, so the experts on the matter sometimes don't feel like experts. Let's see what we know and can learn from what's out there.

Looking at the 2008 recession (and ... Denmark?)

Back in August, Freddie Mac deputy chief economist Len Kiefer tweeted that interest rates on home loans dropped for four of the five years following 2008. If you count 2020 as a recession, which many already do,  and the rates are already historically low -- the 30-year fixed rate is 3.05% right now -- could they drop to zero or even negative? It's theoretically possible. And heck, it happened in Denmark! Freddie Mac, for its part, thinks the rate will be 3.2% (30-year) across 2021, which is still a comparatively low rate. So why can't we get to 0%? What's the difference in Denmark, per se?

Well, first off, mortgage rates are not directly controlled by the Federal Reserve. They actually follow the direction of longer-term bond yields, including the 10-Year Treasury Note. When the pandemic first became an obvious concern, what the Fed did was cut the short-term federal funds rate to near-zero, and subsequently mortgage rates and 10-year Treasury yields reached nearly-historic lows. 

This brings us back to Denmark. There, central bank rates had been negative for about five years before rates hit zero. That is not the Federal Reserve's goal at present, or probably anytime in the future. 

Plus: demographics. The USA is younger than Europe and Japan, which is one reason for slower economic growth in those areas. If the US hit a prolonged GDP decline, the Fed might be more inclined to move rates towards zero. But then you need to factor in something else.

The role of investors

“Mortgage rates are determined by investor demand for mortgage bonds,” said Matthew Speakman, an economist at Zillow.

“A precipitous drop in rates would likely prompt a surge in refinancing demand, and loans that only generate a few payments before being refinanced aren’t profitable for investors,” Speakman added. “This dynamic would weaken investor demand and result in higher rates.”

Right, right. So we'll probably stay in the 2-4% range for a while, but that all begs the question ...

Will mortgage rates go back up?

Now we need to bring in COVID and its potential impacts and intermediate-term repercussions. 

Per Bankrate:

Brian Koss, executive vice president of Mortgage Network in Danvers, Massachusetts, sees continued uncertainty past September until the end of the year.

“That uncertainty will be further complicated by the upcoming election. That’s why I believe rates will stay within 25 to 50 basis points of where they are now,” adds Koss. “Two of the biggest factors that will affect rates are the implementation of a COVID vaccine and muted coronavirus cases in the winter. These two events could cause a bond selloff, making rates go up.”

Perhaps the biggest risk to interest rates is higher inflation.

“With the federal government providing so much stimulus to the economy, there have been trillions of dollars printed over the last few months and less production as businesses remain shut,” McGrath says. “If consumers and businesses start to use all of that stimulus while production remains low, inflation will pick up and the Fed will have to raise interest rates.”

{McGrath is the founder of Yoreevo.}

In short: no one knows exactly, but to think we'd enter 6-7% territory immediately probably will not happen. 

Above all else, for the next 20-25 days in advance of any elections, try to remember this:

Neither the U.S. government nor the Federal Reserve currently set mortgage rates. Instead, mortgage rates are largely a by-product of price movements for mortgage-backed securities (MBS), complex financial products bought and sold on the secondary market.

While the government and the Federal Reserve do not set mortgage rates directly, they each can influence interest levels. When the federal debt increases, it means the U.S. government must borrow more from investors worldwide. Such borrowing creates additional demand for investor funds, and that can nudge rates higher. Alternatively, if the government pays down the debt, there’s less competition for investor money.

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About the Author

Ted Bauer

Ted Bauer is a writer/editor for White Rock Locators focused on as much cool content about the DFW Metroplex rental scene as he can possibly find week-to-week.