How Low Will Mortgage Rates Go?

It seems that lately we reach a new all-time low for mortgage rates just about every week, which begs the question, how low can they go?

Indeed, mortgage rates have hit record lows eight times so far in 2020, and it is only mid-August.

If you had to bet, you’d probably guess that we’d see at least two more record lows this year, given the recent trend of lower and lower.

I assume that too would break some sort of record for most record lows in a calendar year, but that’s unclear.

What is clear is that we continue to see old records get broken with relative ease, and at this point even lower rates feel like a given.

The 2020 mortgage rate predictions are now totally laughable, with a 30-year fixed around 3.75% the most common response.

Can Mortgage Rates Get Even Better from Here?

how low will mortgage rates go

  • Fixed mortgage rates are already at all-time record lows
  • There have been eight record lows this year, including three record lows in three weeks recently
  • Is it possible that mortgage rates could move even lower in the second half of 2020?
  • The trend certainly seems to point to even lower rates, especially with wide spreads relative to Treasuries

As noted, mortgage rates are hitting record lows so often it’s becoming a bit of a non-event. Heck, I don’t even write about it anymore.

And it’s hard to know if homeowners are even excited about it at this point. When something happens on a weekly basis, it’s difficult to garner any sort of novelty.

There’s also an expectation at this point that mortgage rates will simply get better and better and better.

Oddly, you can’t blame folks for thinking that way because they’re probably right.

If you asked me right now if I thought mortgage rates would move even lower from their current levels, I’d say YES with no hesitation.

That’s not just a gut feeling – it’s based on math and data and events going on in the industry and the world.

Just Look at Spreads If You Want a Hint

treasury spreads

For one, the spread between 30-year fixed mortgage rates and the 10-year Treasury (which they track) is super wide at the moment.

At last glance, the 30-year fixed was averaging 2.88%, per Freddie Mac, while the 10-year yield was around 0.55%.

While yields did “jump” a tad in the latest week, the spread is still historically large, around 225 basis points.

Typically, the spread might be 170 basis points or even less, meaning the 30-year fixed could easily be pricing around 2.25% today if spreads were more normal.

This implies that mortgage rates have plenty of room to move lower, despite hitting a fresh record low just last week.

The next clue that mortgage rates may fall even more is the fact that a 2.25% mortgage bond coupon has already been introduced, all the way back in April.

That came four months ago, and we’re now in a very different, arguably more volatile and fragile August, which tells me it’s a matter of time before the 30-year fixed moves to that range and possibly beyond it.

Lower Mortgage Rates Are Already Being Offered

Finally, we’re already seeing certain mortgage lenders offer the 30-year fixed below 2%. So it’s not just a question of if, it’s already a reality.

This week, wholesale mortgage lender UWM announced the availability of a 1.999% 30-year fixed mortgage rate via its Conquest program.

In order to get that rate, you need to work with a mortgage broker since UWM doesn’t work directly with the public.

You also need to qualify for that rate by being a solid borrower with a vanilla loan scenario, e.g. excellent credit score, low LTV, conforming loan amount, etc.

And there’s a good chance you’ll need to pay mortgage discount points to obtain that rate.

That brings up another important point – it may not be wise to pay points right now given the trend of lower and lower mortgage rates.

If you’re just going to refinance your mortgage a second time a couple months later, you certainly don’t want to pay lots of money upfront for a home loan you’ll barely keep, and thus not actually benefit from.

Now in terms of how low mortgage rates will go, that’s anybody’s guess, but at this point I wouldn’t rule anything out.

We’re already seeing mortgage rates in the 1% range, and we’ve got the potential for a very wild second half of the year with a contentious U.S. presidential election and a stock market that refuses to read the writing on the wall.

The only real caveat, as I’ve mentioned before, is the lower you go, the harder it is to see massive improvement.

After all, if mortgage rates are already in the 1% range, how much better can they really get?

The caveat to that statement is I said the same thing when mortgage rates were 3%…


Existing home sales are still too hot

The National Association of Realtors reported that existing home sales for January were at 6,669,000, which beat estimates. The year-over-year growth was an impressive 23.7%. The median sales price also jumped 14.1% year over year, which I warned could happen during the years 2020-2024. On a recent HousingWire podcast, I discussed the need for higher mortgage rates to cool down this growth rate.

Currently, the 10-year yield is 1.35%, which is now above a critical level that I have talked about for some time. We should all be jumping for joy as the bond market shows the American bears that America is back. Mortgage rates should also creep higher. When the 10-year yield gets into the range of  1.33%-1.60%, we will have achieved our goal for the “America is Back”  economic model that I proposed last year, which I believe could only happen in 2021.

With the yield in that range, we can expect the mortgage rate to move up toward 3.375%. We still have a lot of work to do to earn the right to create this range in the bond market; the first would be hitting 1.60%, which we haven’t yet. The chart below shows the 10-year yield as of the close of Thursday. Today, bonds are selling off and yields are higher.

Mortgage rates are still meager, historically speaking, but 3.375% or higher may be enough to slow the home price growth rate – which, right now, is simply too hot. The days on the market went from 43 days last year to 21 days currently.

So far this year, the MBA purchase application data is running stronger than even I thought. This metric is a predictor trend of demand 30-90 days out. I believed the peak rate of growth in purchase applications would be around  11% year over year up until March 18th. It is trending at 13.1% this year, so we are off to a good start for 2021.

New home sales, existing home sales, and the builder’s confidence index that went parabolic towards the end of 2020 have stopped going up and started to fall.  The last report on new home sales shows that housing data moderates and moves back to the trend.

The monthly sales prints for existing home sales show that this metric has stopped its parabolic move higher, but it still has not moderated enough. We still have not  completely made up for the lost sales in 2020 due to COVID-19.  We should have ended 2020 with 5,710,000 -5,840,000 in existing home sales but only realized 5,640,000.  This number is only 130,000 higher than what we had in 2017, so this isn’t the booming speculative buying we saw during the height of the housing bubble years.

Once this makeup demand is exhausted, existing-home sales should moderate toward 6.2 million or even lower to get back to the trend. If existing home sales stay above 6.2 million on the monthly sales print for the entire year, we can consider the demand to be even better than expected.

For the rest of the year, the single most important and healthy event for the housing market would be higher mortgage rates to cool down home prices’ growth rate. We will see if mortgage rates rise high enough to cool demand and reduce the multiple bid situation we currently have in many markets.

Nobody wins when the housing market is too hot – not even sellers because they will need to find somewhere else to live. We have enough supply to grow sales to pre-cycle highs, but when choices are limited, the willingness to sell and move becomes less attractive.