Tuesday, May 24, 2011

Mortgage update -- very cheap

With the recent decline in Treasury yields, 30-yr fixed-rate mortgages are now only inches from their lowest levels ever, and the only way they are going to get much cheaper is if 10-yr Treasury yields decline further.

Rates on 30-yr mortgages are largely driven by the 10-yr Treasury yield, since the duration (a combination of the interest rate sensitivity of mortgage-backed securities and their expected average life) of MBS tends to be similar to that of a 10-yr Treasury. As the chart above shows, the spread between 10-yr Treasuries and current coupon FNMA paper (the effective interest rate that a buyer of MBS receives after origination and servicing costs) is relatively low (currently 87 bps), and judging from the history of this spread, it is unlikely to decline much further. And while on the subject of spreads, the spread between conforming and jumbo mortgages is now 38 bps, which is only slightly higher than the average 22 bps spread which prevailed prior to 2007; in other words, jumbo rates aren't going to drop much unless conforming rates do too.

So if you are waiting for mortgage rates to drop meaningfully from today's levels, you should start praying for a real lousy economy. As the chart above shows, 10-yr Treasury yields have rarely been lower than they are today. They were lower only during the deflation and depression era in the 30s and 40s, during the height of the financial panic of late '08, and last summer, when the market feared the economy was entering a double-dip recession. Right now I don't see signs of a recession, a depression, or deflation, so I've got to believe that 10-yr yields are unlikely to go much lower than they already are.

Borrowing money today at a 30-yr fixed rate to buy a house is just about as cheap as it's ever been, and it's unlikely to get much cheaper.


Benjamin Cole said...

Maybe mortgages will get cheaper.

What does a home loan cost in Japan?

sgt.red.blue.red said...

TLT and GLD both were in the green today. Rates can go lower, and GLD will go higher. I put small position on in GLD today. Strange times we live in. I will contact my lender to get ready to better for me the re-fi I initiated in early Oct., 2020, shortly.

Stay tuned.

Mr. Grannis; Thanks for posting the yen-gold chart.

sgt.red.blue.red said...

Oct., 2010, above.

Benjamin Cole said...

Sgt. Red:

No need to hurry. Robert Mundell says deflation is coming, and Greg Mankiw says rates could go lower.

We may see 2 percent mortgages yet.