Thursday, September 15, 2011

Mortgage Rates Fall to New Record Lows; In Real Terms You Can Borrow Now for Free at 0% or Less

Freddie Mac reported today that the average rate on 30-year fixed mortgages fell to 4.09% this week, down from 4.12% last week, and the lowest rate since the early 1950s (see top chart above, news report here).  The 15-year fixed rate fell to 3.30% this week from 3.33% last week, setting a new all-time record low (see bottom chart above).

To purchase a median priced existing home at $174,000 (most recent data available is for July) with a 20% down payment, the monthly payments at 4.09% would be $671.80.  In 2008, when the median priced home averaged $198,100 and the 30-year mortgage rate averaged 6.04%, the monthly payments (with 20% down) would be $954.25, or 42% higher than the current monthly payment of $671.80.

With rates so low, and home prices stable or falling, there's probably never been a better time to buy or refinance a home.  With annual inflation of 3.8% through August, getting a 4.09% 30-year fixed rate mortgage is basically "free money" at close to a 0% real rate (assuming inflation remains at 3.8%).  If you lock in at 4.09% and inflation rises above that rate for some part of the next 30 years, you'll have a negative real rate of interest and you'll pay back less in real dollars than the amount you borrowed - the best of all possible worlds for a borrower.  With a 15-year fixed rate of 3.30% and 3.80% inflation, you're starting out with a negative real rate of -.50% (assuming inflation continues at 3.8%).

If you can borrow $100 and pay back $98 in inflation-adjusted dollars, you're getting paid by the bank to be in debt.  (In that case, it's just like a "negative price" for goods, where you get free merchandise and some cash on the way out of  the store - the ideal outcome for consumers.)  

Bottom Line: The record low mortgage rates and possible negative real interest rates are a great deal for borrowers, but a terrible deal for lenders - are we headed for another S&L crisis?   

21 Comments:

At 9/15/2011 4:40 PM, Blogger morganovich said...

mark-

no, we're not heading for another S+L crisis. they are not the ones making the loans.

freddy and fannie are pretty much the entire conforming market.

they are 70% of the overall market, which makes them close to 90% of the conforming market.

it's not the S+L's you have to watch, it's the federal budget.

 
At 9/15/2011 5:33 PM, Blogger rjs said...

in the same vein, economist karl smith showed that with interest rates as low as they are now, we could eliminate all federal taxes today & borrow 30 years out, & make a profit on that borrowing if the country grows 1.1% annually or more over that 30 year stretch...by not borrowing now, when the rest of the world is paying us to borrow, and investing in infrastructure, renewable energy, job training, and our youth, we are missing a once in a lifetime opportunity...it's not crazy or unprecedented; we had a higher debt/GDP ratio coming out of world war 2, and eisenhower ran deficits to send returning vets to college & build the interstate highway system, and the debt to GDP ratio came down during the 50s expansion anyhow...

http://modeledbehavior.com/2011/09/09/moving-the-overton-window-why-is-the-us-government-still-collecting-taxes/

 
At 9/15/2011 6:07 PM, Blogger PeakTrader said...

RJS, in the first year, even with the record low 30-year T-Bond rate at 3.5%, it'll add about $140 billion of interest payments to the national debt.

However, bond investors would expect inflation to accelerate quickly, sending rates higher, because so much capacity has been destroyed and the economy remains overregulated.

The Fed will drain dollars out of the economy, to compensate, and rising interest rates will likely tip the economy into a long and deep depression.

 
At 9/15/2011 6:18 PM, Blogger Benjamin said...

Capital everywhere. We have global capital gluts.

A great time to borrow money.

 
At 9/15/2011 6:21 PM, Blogger PeakTrader said...

Yields are low, because investors expect slow growth or recession.

 
At 9/15/2011 6:26 PM, Blogger juandos said...

"we had a higher debt/GDP ratio coming out of world war 2, and eisenhower ran deficits to send returning vets to college & build the interstate highway system, and the debt to GDP ratio came down during the 50s expansion anyhow"...

Ahhh, the good old days, eh rjs?

Guess what Eisenhower and Congress weren't paying for though with taxpayer dollars...

LBJ's Great Society crapola...

 
At 9/15/2011 6:39 PM, Blogger JG said...

"Mortgage Rates Fall to New Record Lows; In Real Terms You Can Borrow Now for Free at 0% or Less"

You know, this should not be reported as a sign of good things.

"We have the lowest real rates since the middle of the Great Depression. How wonderful is this?!"

 
At 9/15/2011 6:41 PM, Blogger PeakTrader said...

The best way to spur growth over the next year may be:

1. Cut spending $400 billion.
2. Cut taxes $400 billion.
3. Deregulate heavily (including health care, environment, education, energy, etc.).

And when the expansion is underway, overhaul the entire federal government, including taxes, i.e. an overdue creative-destruction process, to make it much more efficient.

 
At 9/15/2011 8:46 PM, Blogger VangelV said...

Bottom Line: The record low mortgage rates and possible negative real interest rates are a great deal for borrowers, but a terrible deal for lenders - are we headed for another S&L crisis?

I do not think so. It is not companies but the taxpayer who is on the hook for the lending scheme. And if you want to take advantage of negative interest rates a much better play would be to get rid of bonds and to move to gold, silver, and other commodities. They are far more likely to offer protection against a currency decline and real gains. While housing may go up in nominal terms, the loss of purchasing power for the USD will likely still make real estate a very poor bet.

 
At 9/15/2011 10:50 PM, Blogger Hydra said...

Try refinancing a loan on a house that is under water. If you owe a half million and you are assessed a $250,000, the loan rate is meaningless.

 
At 9/15/2011 10:54 PM, Blogger Hydra said...

I prefer to invest in capital tools and equipment than gold. At least you can do something with a bulldozer.

 
At 9/15/2011 10:58 PM, Blogger Hydra said...

This comment has been removed by the author.

 
At 9/15/2011 11:06 PM, Blogger Hydra said...

PT has lost it.

The second last thing
a business wants to do is hire someone, and the last thing is to pay them.

A handfull of large businesses provide most employment, a few hundred thousand businesses have 10 to 99 employees. Millions of small businesses have no employees.

Small businesses are often around for 20 years before their first employee.

 
At 9/15/2011 11:22 PM, OpenID 6ef20796-e01b-11e0-88df-000bcdcb2996 said...

We have been trying for over a year to refinance and can't get anyone to respond. Not bank of america where our mortgage is currently nor at wells Fargo where my wife works. They continue to send out offers though!

 
At 9/16/2011 3:08 AM, Blogger jessica said...

Wow, the mortgage rates are reaching new lows every month. This is certainly good news for the borrowers like me. The real estate market analysts are telling that this is the best tome to take out a mortgage loan. I have started accumulating money from last year. I want to make the required down payment on the loan. I will wait for a few more months. I just hope that the mortgage rates don’t increase by that time.

 
At 9/16/2011 6:53 AM, Blogger VangelV said...

I prefer to invest in capital tools and equipment than gold. At least you can do something with a bulldozer.

Your ignorance is showing. Gold is money and has use as money. Why do you think that so many central banks have finally seen the light and stopped their gold sales? Without money there is no specialization of labour and little need for a tools and equipment industry.

 
At 9/16/2011 8:15 AM, Blogger morganovich said...

though still better year on year, we saw foreclosures heading up again and default notices put up a record spike.

this may have to do with banks rushing to get it done ahead of a new federal principal restructuring cram down. part of the issue with low rates is low demand.

even with freddy and fannie providing outlandish deals, few can get them. many are stuck in underwater homes. many more lack the credit rating to refi, much less get a new loan.

"RealtyTrac® (www.realtytrac.com) ... today released its U.S. Foreclosure Market Report™ for August 2011, which shows foreclosure filings — default notices, scheduled auctions and bank repossessions — were reported on 228,098 U.S. properties in August, a 7 percent increase from the previous month, but still down nearly 33 percent from August 2010.

Default notices (NOD, LIS) were filed for the first time on a total of 78,880 U.S. properties in August, a nine-month high and a 33 percent increase from July — the biggest month-over-month increase since August 2007. Despite the monthly increase, default notices were still down 18 percent from August 2010 and were 44 percent below the monthly peak of 142,064 default notices in April 2009."

purchases are not recovering and are still 45% below the peak.

http://cr4re.com/charts/charts.html?Existing-Home#category=Existing-Home&chart=MBAJuly272011.jpg

they are at about the levels of 1997.

the fact that home price declines and such low rates in conjunction are not stimulating demand tells you that the buyers are either tapped out or boxed out of the market.

mortgage purchase applications are still pretty much right at the lows.

http://www.calculatedriskblog.com/2011/07/mba-mortgage-purchase-application-index.html

 
At 9/16/2011 9:14 AM, Blogger morganovich said...

if you stop and think about it, there is a good reason that homes do not behave like other markets.

if the price of beef drops, demand tends to go up.

but if the price of homes drop, this is not always so. most home buyers are not first time buyers. they already have one. thus, the price drop has depreciated the currency they would use to buy a new one. to them, there has been no price drop. add to this the risk that you go underwater, and you can get a drop in demand. add to that the fear of further drops, and you get postponed purchases.

home price drops are really only of benefit to those seeking second homes or first time buyers.

 
At 9/16/2011 1:39 PM, Blogger Hydra said...

Gold is money and has use as money.

=================================

Try going to the grocery with a bar of gold.

Gold is usually only a paper certificate claiming that someone has the gold and is protecting it for you, a service for which you must pay.

You can of course buy gold coins and keep them at home, same as a bulldozer. But you cannot actually do work or create anything with the coins, you must trade them to someone with the tools and equipment to do work for you.

And the coins are more likely to be stolen.

 
At 9/16/2011 2:24 PM, Blogger Eric H said...

Yeah, but they don't need diesel fuel, hydraulic hoses & cylinders, batteries, a truck and float to move them...

So hoard diesel and hydraulic fluid so Hydra will trade with you (since you can't eat a bulldozer either).

 
At 9/16/2011 9:47 PM, Blogger VangelV said...

Try going to the grocery with a bar of gold.

Gold has been money and maintained its purchasing power for six thousand years. No paper money has ever lasted more than 100. The USD is has lost more than 80% of its purchasing since Nixon severed the link to gold. In the next few years it will lose most of the rest.

Gold is usually only a paper certificate claiming that someone has the gold and is protecting it for you, a service for which you must pay.

No, gold is gold. Some people are stupid and buy certificates that are not linked to specific bars but that is a problem for them, not for those that have physical or units in trusts that have physical holdings that are audited.

You can of course buy gold coins and keep them at home, same as a bulldozer. But you cannot actually do work or create anything with the coins, you must trade them to someone with the tools and equipment to do work for you.

Gold is the free market's choice as money. And real money only facilitates economic transaction and protects purchasing power.

And the coins are more likely to be stolen.

No more likely than your paper money. Actually, that does not have to be 'stolen' to have you lose purchasing power. As Ron Paul pointed out, a gallon of gas is still only worth a silver dime. It did not go up in price. The value of the USD simply fell.

 

Post a Comment

Links to this post:

Create a Link

<< Home