Friday, October 16, 2009

Mortgage Rates Below 5% = Inflation Will Be Low

McLean, VA Freddie Mac today released the results of its Primary Mortgage Market Survey in which the 30-year fixed-rate mortgage (FRM) averaged 4.92% with an average 0.7 point for the week ending October 15, 2009, up from last week when it averaged 4.87%. Last year at this time, the 30-year FRM averaged 6.46%.

"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).


At 10/16/2009 10:03 AM, Anonymous morganovich said...

this is largely being driven by massive increases in FHA lending and fed purchases of mortgages at shockingly low rates. the FHA alone is up over 400% and is requiring very low down payments (around 3%).

so be careful extrapolating inflation expectations here. this market is not currently behaving freely and it's data is not showing what it would if it were mostly private loans.

default rates on FHA loans are already skyrocketing.

this is the next crisis. watch what happens when the fed program ends in march (assuming it does so as planned).

and watch the FHA. they will need another huge bail out shortly and again will try to blame capitalism for their massive redistribution agenda.

it's ironic that between them, the FHA and the CRA have done more to harm the economic condition of poor americans than any other legislation in history.

At 10/16/2009 12:11 PM, Anonymous LoneSnark said...

I disagree. It means interest rates will be low in the future, not necessarily inflation. Afterall, a 5% return on dollars that are now worth 10% less is still better than a 0% return on dollars that are still worth 10% less.

As such, a 5% 30 year mortgage simply means the lender is confident the Fed. will keep interest rates low in the future, whether inflation is high or low.

I suspect this is the case because commodities are usually the way of escaping inflation, allowing an outlet for money which drives up interest rates. But Gold is already $1k, even rampant inflation would not justify such a price, so they have no choice but to lend money for money.

At 10/16/2009 1:31 PM, Anonymous Anonymous said...

Perhaps you can identify any period in our history, or the history of any country for that matter, where there is both high inflation and low interest rates.

At 10/16/2009 4:23 PM, Anonymous LoneSnark said...

I recall Mexico being in that situation once. Inflation was absurdly high, and by western standards interest rates were also high, but no where near as high as inflation, so everyone raced to funnel their pesos into bank accounts overseas. Those that could not accepted that the money they got back from their bonds was worth less than the money they put in.

At 10/16/2009 7:28 PM, Blogger doshimaitri said...

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At 10/17/2009 12:32 AM, Blogger OBloodyHell said...

How is this situation not begging for another housing bubble?

At 10/17/2009 5:16 PM, Anonymous gettingrational said...

Morganovich, thanks for the link to ShadowStats. I will add it to my financial favorites.

Your observations about FHA defaults are troubling because FHA loans have been somewhat more selective. I am not as pessimistic as you seem to be but the $8000 first time buyers credit does seem to need an extension of at least six months.


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