Are long term low Mortgage Interest Rates here to stay?
In case you haven’t noticed, the Real Estate market, at least in Southern California, has been on an upward tear since 2012. Hence, we are seven years into the latest price appreciation of Real Estate in SoCal. There are numerous factors that have contributed to this upward cycle such as the robust economy, pent up demand, supply/demand, and the topic of this article - low mortgage rates.
Therefore, lets delve into interest rates a little further to fully comprehend this component of Real Estate. First, what determines the 30 Year fixed Mortgage interest rate (Long term rates)? Despite popular opinion, long term Mortgage rates are not necessarily based off the federal reserve rate. The barometer for the traditional 30 Year fixed rate is the 10 Year U.S. Treasury Bill or 10 Year T-bill. Without over complicating the topic, when the 10 Year T-Bill Interest rate decreases, long term 30 Year Mortgage rates tend to decline as well.
Below are two charts, the first chart indicates the historical averages of the 30 Year Mortgage Rate and the second chart indicates the historical yields of the 10 Year T-Bill. Hence, notice the correlation:
30 Year Mortgage Rate Historical Chart
10 Year T-Bill Historical Chart
Lastly, back to my original question, are long term low Mortgage Rates here to stay? I believe yes at least in the upcoming decade, below is my rationale. First, U.S. Treasury bills are sold throughout the world and are considered a safe haven for world wide investors, thus the continued demand for U.S. Treasury bills as an attractive safe investment will keep yields low. Second, the U.S. government has an interest in keeping yields low since the federal deficit is approaching 22 Trillion. Let me elaborate, the U.S. government has to pay interest on bonds. Therefore, it has a keen interest in artificially keeping the interest on treasury bills low. Thus, the lower the yield on treasury bills, the less interest the U.S. government has to pay on bonds which in turn keeps the looming federal deficit under reasonable management. Third, Politicians and the government have an interest in keeping mortgage rates low as the economic engine of the U.S. is based on the purchase of consumer goods by the average Joe. Thus, if mortgage rates are low, housing appreciates in value and in turn the average Joe can refinance their house and buy more goods.
In summary, in my opinion long term rates will remain low at least for the unforeseeable future for the reasons specified above. About the author, Dave Crowell, American Dream Realty, is a top producing Realtor in Camarillo, California. To contact Dave Crowell, call 805-300-3345 or visit his website at Dave Crowell Realtor.