Mortgage Rates Below 5% = Inflation Will Be Low
"Mortgage rates rose slightly over the week, but rates on 30-year fixed mortgages remained below 5% for the third consecutive week," said Frank Nothaft, Freddie Mac vice president and chief economist. "Homeowners are taking advantage of these low rates to refinance their current balances. Over the past five weeks ending October 9, more than three out of five mortgage applications were for refinancing, according the Mortgage Bankers Association.
MP: The chart above shows monthly mortgage rates back to 1965 to help put the current situation into perspective. There has never been any comparable period since the 1960s when 30-year mortgage rates have remained so low for so long. On a weekly basis, mortgage rates have been below 5% for fourteen weeks so far in 2009, including the last three weeks.
Mortgage rates climbed to historically high levels in the late 1970s and early 1980s because of historically high levels of actual inflation and expected inflation.
If inflationary pressures are now building up in the U.S. economy, and future inflation is expected to rise, why aren't those inflationary pressures being reflected in the bond market (see related CD post) or the mortgage market? For those worried about future inflation, this would be a great time to re-finance your mortgage at the current rates of below 5% for 30 years. All it would take is an actual inflation rate of above 5% sometime during the next 30 years to result in a negative, real interest rate, the best of all possible worlds for a borrower (it's like borrowing $100 from a bank, but only have to pay back $99, $95 or $90 in real dollars).