How low can rates go?

Jay Vorhees at JVM Lending recently shared a great blog, which I have posted in its entirety below. As usual, I’ve added my two cents to the topic at the end. Hope you enjoy!

One of the most interesting aspects of the COVID-19 crisis is its effect on interest rates. In “normal” times, mortgage rates correlate closely with the 10 Year Treasury Bond. In other words, when the 10 Year moves higher, so do mortgage rates and vice versa.

Also, “the spread,” or the difference between the 10 Year Yield and mortgage rates in normal times averages about 1.5%, meaning the average mortgage rate is usually about 1.5% higher than the 10 Year Yield. Since the COVID-19 crisis started, however, the “normal” correlation and spread have disappeared.

10 Year Treasury Yields have plummeted much farther and faster than mortgage rates. In addition, mortgage rates don’t always move in conjunction with the 10 Year, and the “spread” between the 10 Year and the average 30-year mortgage rate has jumped to over 2.6%!

Mortgage rates remain higher than expected for a few reasons that I have illuminated many times. One reason is that lenders could not handle the onslaught of refi volume if they lowered rates any more. But the important reason has to do with risk. Mortgages are much riskier now because of unemployment, forbearance, and liquidity concerns; higher mortgage rates simply reflect that risk.

HOW LOW WILL RATES GO?

If the market returns to “normal;” if the 10 Year remains as low as it is now (around 0.6%+); and if the “spread” between the 10 Year and mortgage rates drops back to the 1.5% range, we could see 30-year mortgage rates drop another 1%!

Yes, that means 30-year mortgage rates as low as 2%!

SHOULD BORROWERS WAIT TO REFINANCE?

Absolutely not, and this is why.

First and foremost, the above scenario requires a lot of major “ifs.” And in this extremely volatile economy, anything could happen to derail the downward rate spiral, including inflation, new regulations or government actions, less competition in the market, renewed liquidity crises, and/or a faster than expected economic rebound.

Additional reasons to refinance now rather than waiting include: (1) most refinances are “no cost” so borrowers can simply refinance again if rates fall further; (2) borrowers can save hundreds of dollars per month by refinancing now at no cost, so why defer the savings? And (3) refinancing is relatively painless now with all of the new technology in place, so refinancing again should not be a concern.

This has been our mantra for years and it bears repeating – borrowers who wait for pristine market conditions (with respect to both housing prices and interest rates) often get burned. And that is because in this world of extreme volatility, nobody really has a clue what will happen.

Kristin’s take: I have had many conversations with buyers who are wanting to “wait and see,” and many keep asking if prices have come down. Prices have not come down (with the exception of the luxury market) and we are currently seeing multiple offers or properties pending in 5 days, especially in the entry-level market. Of course, it depends on the home: is it updated? Is it priced at fair market value or lower? And so on. I believe the window to negotiate or get a great deal was within the first 6 weeks of our shelter-in-place because there was so much unknown. For those who had a higher level of risk tolerance or just needed to buy a home, I believe hindsight will show they got a deal (comparatively).

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