Thursday, August 11, 2011

1-Year ARM, 15-Year Fixed Rates Fall to New Lows

The rate for one-year adjustable mortgages fell to 2.89% this week, setting a new all-time record low going back to April 1986, when weekly data for ARMs started being collected, according to a weekly mortgage market survey released today by Freddie Mac (see top chart above).  The average fixed rate for 15-year mortgages fell to 3.50%, the lowest rate in the history of this series, which started in 1991.  Rates for the 30-year fixed mortgage fell to a 9-month low this week of 4.32%, which is the lowest rate since mid-November of last year, when the 30-year rate fell to an historic record low of 4.17% (see bottom chart above).

Given those historic low, or near historic low rates for mortgages, it would seem hard to make a strong case for higher inflation in the coming years. Back in the late 1970s when high inflation really was a problem, the 30-year fixed mortgage rate was approaching 20%. But now with one-year ARMs at 2.89% and 15-year fixed rates at 3.5% (both record lows) and 30-year fixed mortgages at 4.32%, there sure isn't much of an inflation premium incorporated into those record-low mortgage rates.


At 8/12/2011 12:03 AM, Blogger Don said...


I think I would look at the situation the other way around.

If I am a bank with money to lend it doesn't matter what I expect future inflation to be. Unless I want to sit with my vault filled with depreciating cash, I have to compete (with a low interest rate) with all the other banks that have money to lend.

This means that a low interest rate tends to imply a larger number of banks each having a larger quantity of loanable funds than would be the case if interest rates were higher, if every thing else were equal.

Future price inflation does not simply occur because of a larger quantity of money, but it happens, good by good, when an increase in demand encounters a smaller or no increase in supply.

One of the main ways that demand increases is an increase in the amount of nominal money held by individuals. Independent of exactly it happens, it certainly seems logical to expect that a larger supply of loanable bank funds will lead to a larger supply of nominal money leaking into the hands of individuals, as compared to a smaller supply of loanable bank funds.

In summary, I see the lower interest rates as more likely leading to higher future price inflation, than the opposite.

Regards, Don

At 8/12/2011 12:46 AM, Blogger Admiral said...

Don, you raise a good point about what competition amongst banks means, but I think your conclusion is incorrect. The lower interest rates do, all things being equal, imply that inflation expectations are low.

Personally, I believe that your point may mean something else: namely that interest rates may be affected by other things and there's no doubt that increased competition would AFFECT the rates downward. To me, however, the bigger point is that it is likely more a statement on how desperate the banks are.

My argument is that banks are relatively constrained in the methods of their profit-making at the moment and these loans are one of their old faithfuls. My belief is that *despite* inflation expectations, which surely must be higher than these interest rates alone indicate, they are keeping the rates low... showing that some markets are worse off than we expected or know.

At 8/12/2011 1:18 AM, Blogger Don said...


"...The lower interest rates do, all things being equal, imply that inflation expectations are low...."

I am willing to agree with this, but low inflation expectations do not necessarily mean that the actual probability of low inflation is high, especially in the face of a central bank that wants to increase inflation, having an almost certainly irrational fear of deflation.

If you have 20% mortgages in the 70's, who is more desperate for for the loan to be consumated, the bank or the homeowner? It is of course the homeowner and the bank will be sure to ensure its profitability by taking its inflation expectations into account.

With low present mortgage loan interest rates, OTOH, it is the bank that is the most desperate to get consumers to take a seemingly unending flood of money off its hands. Money in the vault is NOT an indication of a good business franchise that looks like a good takeover target.

Regards, Don

At 8/12/2011 1:21 AM, Anonymous Anonymous said...

There is still competition in the marketplace for loans, so lenders willing to accept low rates drive prices down.

The problem is the Fed. If you can borrow money from the Fed at 1% and lend it out at 4%, that's not only just as profitable but much, much safer than borrowing at 5% and lending at 8%. It keeps the real estate markets artificially bouyant and liquid.

Banks need the MBS markets to open up again. The carry trade is a fickle thing, and the banks don't want to be caught holding 4% mortgages when the Fed inevitably raises rates.

Since it's all printed money, the Fed in effect privatizes profits (for the banks) while socializing the costs (general inflation and debasement of the currency).

At 8/12/2011 2:35 AM, Blogger PeakTrader said...

The U.S. economy is being restructured and heading towards stagflation, in part, because of big government and peak oil.

Attempting to raise real GDP will likely lead to accelerating inflation more than real economic growth.

Interest rates are low now, because the economy is on the verge of recession.

Americans will pay more, or work harder, for less quantity or quality.

At 8/12/2011 4:34 AM, Blogger rjs said...

US 10 year debt & japanese bonds also hit new low what was all the fuss about with that downgrade

At 8/12/2011 7:45 AM, Blogger morganovich said...


rents are up a great deal already (and there are more renters and fewer owners). in markets like NYC and SF, they are up double digits.

nationally they are up in the 5% range. the vacancy tare is dropping and is projected to drop under 5% in the next year or two.

new mortgages are very difficult to get, as are refis.

actual mortgage activity is VERY low.

a refi only benefits you if you can get one.

cost in housing is currently heading up, not down.

dropping purchase prices only helps you if you are first time buyer. if you already own, your currency is devaluing too.

these rates have little to do with inflation expectations and everyhting to do with the fact that freddie and fannie have become 70% of the market.

this is just a massive federal subsidy to try to prevent further home depreciation.

i'm very surprised to see you making this argument mark. you seem pleased with areas like miami where big price drops a re driving transaction volume.

why would you be glad to see federal interference in this process nationwide and the inevitable taxpayer funded costs that will come from lending too cheaply?

At 8/12/2011 7:52 AM, Blogger morganovich said...

june rental prices were up 6.7% from a year earlier.

sure looks like inflation to me.

At 8/12/2011 11:17 AM, Blogger Buddy R Pacifico said...

Do you want to buy a ten-year federal government inflation protected insturment? OK, "what is the yield?" you would surely ask. 10 Year TIPS Yield = 0%.

At 8/12/2011 11:55 AM, Blogger morganovich said...


indexed to CPI is not the same as inflation protected.

the reason no one buys them is that anyone actually concerned about inflation knows they are a bad hedge because CPI runs too low.

people are protecting themselves with commodities (esp gold) and with forex trades, not TIPS.

also note:

the yield you are quoting does not include CPI adjustment.

if you are willing to take a tips at zero vs a 10 year at 2.25, that's saying that you expect inflation to exceed 2.25.

the 5 year tips just sold with a negative yield.

that implies higher CPI expectations.

but still, i think they are a lousy way to hedge inflation, especially monetary driven inflation.

At 8/12/2011 12:06 PM, Blogger Benjamin Cole said...

Inflation is deader than Jimmy Hoffa.

House prices in LA County, where 10 million people live, fell in July from on year earlier. And now you get an all-time cheap mortgage.

Interest rates will go down from here. See Japan.

We may have some inflation, but not in manufactured goods, real estate, or unit labor costs.

Even oil hits a wall at $100 or so. Demand shrivels while supply becomes lush.

At 8/12/2011 12:48 PM, Blogger Buddy R Pacifico said...

"indexed to CPI is not the same as inflation protected."

Agreed, but there must be those that think even CPI will accelerate, based on recent TIP price movement going up.

At 8/12/2011 2:22 PM, Anonymous Anonymous said...

First, I'll say that predicting inflation is likely almost impossible, which is why long-term fixed loans are inherently a dumb idea. Second, I'll note that your 30-year mortgage chart shows interest rates only peaking in 1982, while most inflation charts show a peak in 1980. This indicates that 30-year mortgage rates are a lagging indicator, which makes perfect sense, considering how impossible it is to forecast inflation.

At 8/12/2011 3:15 PM, Blogger morganovich said...


rents paid are up 6.7% in a year.

that is affecting far more people than mortgage rates.

as ever, you demonstrate that you don't really understand how inflation works.

At 8/12/2011 3:17 PM, Blogger morganovich said...


agreed. people are definitely pricing higher CPI into the TIPS.

the rates on the short end are strongly negative.

At 8/12/2011 6:21 PM, Blogger JG said...

I remember a few years back when Greenspan recommended adjustable rate mortgages, and was promptly savaged for it from all directions (for instance).

Look who was right.


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