Thursday, December 11, 2008

Mortgage rates are collapsing (2)

Wow, interest rates just keep tumbling. Most importantly, mortgage rates are tumbling. The spread between current coupon FNMA MBS securities and 10-year Treasuries has very quickly come down to levels that are more in line with historic norms. They might go a bit lower, but we've most likely seen the bulk of the declines. With FNMA issues carrying a coupon of roughly 3.8%, you can expect to see rate on 30-year fixed-rate, conforming mortgages fall below 5% very soon, with 4.5% as a not-impossible target.

Since the end of October, mortgage rates have effectively fallen by about 2 percentage points. That translates into a reduction of about 20% in monthly mortgage payments. And that makes housing about 25% more affordable for most folks. Combine that with the 30% reduction in inflation-adjusted home prices as recorded by the Case-Shiller index since 2006 (at which time mortgage rates were almost as high as they were in October), and the bottom in housing prices is now approaching at a much faster rate. This is simply excellent news, because the survival of the banking industry will be a big source of uncertainty unless and until housing prices stop falling.


Tom Burger said...

Ahhh, the miracle of the free market in action.

This will really help: all we need to do is get some more uncollectable mortgages out there to further distort house prices. Yip, that ought to take care of our economic problems just fine. :-)

Tom Burger

Brian H said...

Tom - being that "uncollectable" mortgages were largely created by government social intervention, placing blame on free markets doesn't hold.
Lower rates will stabilize home prices, and if the loans written going forward are conventional and require sane down payments, why would low rates and stable prices be a bad thing?

Tom Burger said...


I guess I didn't make my sarcasm clear. I am certainly not blaming free markets. Nor do these rate reductions have anything at all to do with free markets. Have you not been noticing the treasury and Fed antics all desperately trying to drive down long term interest rates. THAT is what I am objecting to.

Tom Burger

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