Monday, January 25, 2010

Mortgage rate update

As the top chart shows, 30-year fixed rate jumbo mortgage rates are going for a post-crisis low, a rate not seen since 2005. With a few scattered exceptions, the rate you get today is about as low as it has ever been in history. Conforming rates are still very close to all-time lows.

As the second chart shows, the fundamentals driving these rates (i.e., 10-year Treasury yields and the spread between MBS and Treasury yields that investors demand in order to compensate them for the prepayment risk of mortgage-backed securities) suggest that we are unlikely to see rates go lower than they are now. Treasury yields are quite low from an historical perspective, and spreads are about as tight as they have ever been.

One other interesting fact that shows up in the first chart is that the difference between jumbo and conforming mortgage rates is still quite large. That means that even if conforming rates move higher, it will likely take awhile before jumbo rates move higher; the spread between them could compress by another 25-50 bps. However, I should also point out that the declining spread between jumbo and conforming loan rates is a very good sign that private capital is returning to the mortgage market. The Fed is only buying conforming mortgages, not jumbos, so jumbos have been outperforming conforming MBS, which in turn suggests that private capital has been actively seeking out the higher yields on jumbos. That is also an indication that when the Fed stops buying MBS at the end of March, there is no reason to expect mortgage rates to move significantly higher.

I continue to believe that prospective homebuyers would be well-served to choose a 30-year fixed rate mortgage instead of an adjustable rate. Fixed rates are very low from an historical perspective, while the short-term rates that drive ARMs are very likely to rise significantly in coming years. With the fixed rate you get the certainty of locking in an historically low rate, but with adjustable rates you are exposed to considerable uncertainty down the road, because no one knows today how high short-term rates will be in the future.


Benjamin said...

Well, I can remember 4 percent mortgages in the 1960s. We may see those rates again. There is lots of capital seeking a home (no pun intended). Right now, capital is skittish of housing markets. We can hope that will wear off in time.
The chronic global glut of capital (due to high savings rates in Asia and Europe, and huge pools of capital formation in the US) will mean interest rates stay low--maybe for generations.
I think what may be shaping up is a great time to be a borrower, but not so great to be a lender. Passive investing may be very tough for the next couple of generations, while economic growth is fine. Too much capital chasing too few deals. If someone can invest in something by pushing a button, then that something may be overinvested already.
Starting your own business may be the way to go. Or pre-herd investing.

j said...

Wondering what your thoughts are about the impeding end of gov't support of the mortgage backed securities market? Is private capital ready to step up and provide adequate markets to support the still fragile housing recovery? Thx.

Scott Grannis said...

Benjamin: I should have clarified that I'm referring to 30-year fixed rate mortgages, which did not exist in the 1960s since there was no 30-year Treasury bond back then. 30-year T-bonds didn't appear until the 1970s.

I should also have noted that the declining spread between jumbo and conforming loans is a good sign that capital is returning to the mortgage market. The Fed is only buying conforming loans.