Thursday, August 18, 2011

Record-low mortgage rates


30-yr fixed mortgage rates have never been lower than they are today, thanks to record-low yields on Treasuries, a weak housing market, and plenty of loanable funds sloshing around the world's capital markets. For all those who can qualify for a refi, this is one more opportunity of a lifetime.


Refinancing activity understandably has surged in recent weeks and is likely to continue, though it seems unlikely we'll exceed the high that occurred in late May 2003 (see above chart of the Mortgage Bankers' Association Refi Index, whose latest value is 3915). That high occurred thanks to a plunge in 10-yr Treasury yields to almost 3%, which in turn was driven by the market's belief that the economy was mired in a jobless recovery. As history buffs will recall, the Bush II tax cuts were passed in June '03, and the economy subsequently staged a surprising recovery which vaulted 10-yr yields back up to 4.6% by the end of the summer. It would be wonderful to see history repeat itself.

UPDATE: Mark Perry has a collection of other interesting mortgage-related statistics here.

17 comments:

Bill said...

Good news of course but the operative phrase is "for all those who can qualify for a refi". The trouble is (1) many if not most people cannot qualify for a refi and many of those who can do not have sufficient equity in their homes to be approved for a refi.

William said...

Damn, I was a week too early!

randy said...

I was talking to my father about this, and he was commenting how fortunate those of us with mortgages are... "never saw that in our days". What's ironic though is that for those of us that don't need a mortgage ( i.e. have enough in investments to pay off our mortgage ) paying off the mortgage sounds really appealing right now. A guaranteed 4% return over the next decade sounds pretty appealing.

Scott Grannis said...

randy: You are right that paying off a mortgage is equivalent to investing with a return equal to one's mortgage rate. But if you include the impact of taxes the picture changes. For most folks, mortgage interest is deductible, so the after tax cost of the typical mortgage with a 5-6% rate is about one-third less. Mortgage interest is the only tax-deductible interest available to most folks. It is effectively subsidized (however wrongfully) by the government. The after tax cost of a mortgage taken out today is only 3% or so, and that compares very favorably to current and projected inflation. It's not obvious that paying off a loan with a near-zero real after-tax interest rate locked in for up to 30 years is a good idea. Similarly, rejecting a free subsidy is also not an obvious course of action.

randy said...

You are correct of course. But with AMT and deduction phaseouts, I don't get the full benefit. Sleeping better has it's benefit too. But thank you for clarifying that.

septizoniom said...

is it good news if people who would pick a peck of peaches for a $1 now would pick them for $0.25 if the decline is due to a surfeit of labor?

John said...

Useless liquidity. A damn shame.

Tennesee Moultansanti said...

my sister just got locked in at 4.2%, and she barely avoided a foreclosure less than 3 years ago, filed for bankruptcy 12 years ago, god i love this freakin country.

it would be even better if this could finally pull some buyers off the sidelines and into the market.

mmanagedaccounts said...

For me the big news on Thursday was the Philly Fed Index dropping to
-30.7. Looking back to 1969 this Index has penetrated -30 just 7 other times and all 7 were either nearing or during a recession.

Dr William J McKibbin said...

Real estate is relatively inexpensive right now -- couple low prices with low interest rates and yes, now is a good time to lock-in long-term refinancings -- now may also be a good time to add rent-paying real estate to one's portfolio -- be very careful however about what is truly rentable and be sure to deduct all deferred maintenance from your offers to sellers -- plan on a minimum 35% downpayment as well to finance rental property acquisitions -- but yes, low prices plus low interest rates spells opportunity in real estate for saavy investors...

William said...

Off Topic

RE: NYSE Market -

A bit of good news from yesterday's nearly 500 point fall on the DOW was that NYSE volume at 450 billion shares was significantly less than on last weeks 500 point gyrations when NYSE daily volumes were 600 to 700+ billion shares.

Jim said...

Mortgage rates could be cut in half and that wouldn't do anything. You need the government to stabilize them, and force banks to lend.

Dr William J McKibbin said...

Hi Jim, monetary and fiscal-policy have exhausted their resources -- said another way, the government has no chips left to play with -- we all need to avert our eyes away from the government players at the table, and now look into the eyes of everyone else who remains in the game, and especially those with the most chips -- we are entering the best part of the game right now -- fortunes will be won and lost by ordinary players (people rather than than governments) in the coming months -- as for the government players, like I said, they have no chips left to play with, and lots of IOU's to settle as they quietly exit the game...

randy said...

Greg Mankiw recently published a study that suggests the govt still has some resources, though they are of "last resort"

http://www.economics.harvard.edu/faculty/mankiw/files/Exploration%20of%20Optimal.pdf

Here is extract of conclusion:

The third level of the hierarchy is reached when monetary policy is severely constrained. In particular, the short-term interest rate has hit the zero bound, and the central bank is unable to commit to future monetary policy actions. In this case, fiscal policy may play a role. The model, however, does not point toward conventional fiscal policy, such as cuts in taxes and increases in government spending, to prop up aggregate demand. Rather, fiscal policy should aim at incentivizing interest-sensitive components of spending, such as investment. In essence, optimal fiscal policy tries to do what monetary policy would if it could. ( randy's note: how about major investment in natural gas infrastructure to replace imported oil? )

The fourth and final level of the hierarchy is reached when monetary policy is severely constrained and fiscal policymakers rely on only a limited set of fiscal tools. If targeted tax policy is for some reason unavailable, then policymakers may want to expand aggregate demand by increasing government spending, as well as cutting the overall level of taxation to encourage consumption. In a sense, conventional fiscal policy is the demand management tool of last resort.

John said...

Attributed to Mankiw:

"policymakers may want to expand aggregate demand by increasing government spending, as well as cutting the overall level of taxation to encourage consumption."

Oh dear. Mankiw wants to INCREASE SPENDING AND CUT TAXES. Sure Greg, let's dig the hole deeper. So much for the Paul Ryan approach.

Public Library said...

Scott,

The plunge in rates is more a sign of coming troubles than a harbinger for real estate investment in my opinion.

The banks can ill afford to loan out for 30yrs at 4% unless the government and Fed subsidize the entire operation for the duration.

Sadly this is what they are trying to do but the unintended consequences will trump the short term gain/euphoria.

We simply need to read the comment from Tennessee above to know why banks are reluctant and that the government (taxpayers) are probably on the hook for her dodgy credit.

The rates do not reflect the risk, only the subsidy.

ashwaria said...
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