BLOG VIEW: Mortgage rates have been consistently below 4% since New Year’s Eve, and there’s no reason to think they will suddenly soar. If anything, the market forces behind the lending process are pointing down in a way that may be historic.
Make no mistake about it – there’s a huge push to raise rates: Savers and retirees who accumulated retirement reserves now find that their capital yields virtually no return. Insurance companies wonder how they will fund future benefits. Bank profits are constrained because of low rates. All of these groups support efforts by the Federal Reserve to raise rates, and yet, the past five rates have bubbled at or near historic lows.
Money, Money Everywhere
The trend on the rate front is hardly one of resurgence, and the odds are pretty good that matters will not improve. To understand why, we have to look at several of the following realities:
First, money is a commodity, and interest levels reflect supply and demand. Demand is in the dumper, and banks can’t loan the money they have on hand. As of May, they had nearly $2.3 trillion in excess reserves – up from the less than $1 billion in 2004.
Second, although the Fed may be able to move bank rates, its authority does not directly include the mortgage marketplace. Mortgage rates float freely with the ebb and flow of the marketplace. According to Freddie Mac, 30-year fixed mortgage rates during the past five years averaged 4.45% in 2011, 3.66% in 2012, 3.98% in 2013, 4.17% in 2014 and 3.85% in 2015. The rate for 2012 was the lowest in 65 years, and 2015 was only off by 19 basis points. In comparison, Standard & Poors reports that mortgage rates averaged 8.6% for the 40 years ending in 2013.
Third, mortgage rates are impacted by events outside our borders – and what’s happening outside our borders ought to give everyone considerable pause.
Negative Interest Rates
Back in February 2015, The New York Times reported that European investors held bonds worth $1.75 trillion that were earning negative interest, while that same month, the Wall Street Journal said the total worldwide was $3.6 trillion. This seemed wildly strange – a huge amount of money purposely generating a return of less than zero. The only logical reason for such an investment had to be a belief that the alternative choices were worse.
But now, an odd thing has begun to happen: The value of bonds with negative interest has grown – and grown a lot.
The Financial Times reported that bonds with negative interest actually totaled $5.5 trillion in January, while in February, Bloomberg put the total at over $7 trillion. In May, Fitch Ratings estimated that there was $9.9 trillion in debt with negative interest – $3.1 trillion in short-term investments and $6.8 trillion in long-term debt. By June, the Wall Street Journal said the latest total was $10.4 trillion.
Anyone see a pattern here?
How, exactly, can mortgage rates rise if the world is neck-deep in a sea of negative investments – a sea that is rising? How can mortgage rates inside the U.S. rise when money can cross borders with electronic speed?
Mortgage Rates And The Fed
One idea is that the Fed will push bank rates higher and, as a result, mortgage interest levels will follow. An alternative thought is that the Fed is stuck on the rate front. As evidence, consider that the Fed’s widely hinted June rate hike fizzled.
Another possibility – dare I say it – is that the Fed could bow to reality and lower interest levels. If this seems implausible, consider that the European Central Bank now has a minus .4% deposit rate, the Bank of Japan is at minus .1%, and in mid-June, yields on 10-year German bonds turned negative.
“Although savers, retirees, banks and insurance companies want higher rates, that’s certainly not the case with mortgage borrowers,” says Rick Sharga, executive vice president at Ten-X.com, an online real estate marketplace. “Likewise, government plainly does not want higher rates. The federal government owes perhaps $19 trillion or $20 trillion, and billions more are owed by states, counties and cities. A rate increase of just one percent could create hundreds of billions of dollars in new costs.”
Mortgage rates would surely move higher if there were more risk in the marketplace, but that’s just not the case. Foreclosure starts are at levels not seen in a decade, and delinquency rates remind one of the 1990s. The issue of risk is minimal, especially when the alternatives are investments and loans in Europe, where Britain left the European Union; in Asia, where economies in China and Japan have slowed; and in the Middle East, where many states are either in the midst of brutal civil wars or on the cusp of open fighting.
Mortgage rates might also move higher if there were simply more demand, but mortgage debt has declined. The Federal Reserve Bank of New York says mortgage debt now amounts to $8.75 trillion, down from the $9.99 trillion owed in 2008.
So, no, materially higher mortgage rates do not seem likely for a very long time. And if rates do start to firm, there’s some $12.7 trillion on tap out there in the form of excess bank reserves and cash invested with negative interest that could quickly flow into the market to once again tamp down rates.
Peter G. Miller is a nationally syndicated real estate columnist. His books, published originally by Harper & Row, sold more than 300,000 copies. He blogs at OurBroker.com and contributes to such leading sites as RealtyTrac.com, the Huffington Post and Ten-X. Miller has also spoken before such groups as the National Association of Realtors and the Association of Real Estate License Law Officials.