Can you believe it?
This week Freddie Mac made the announcement heard around the world. The 30-year fixed-rate mortgage is at 3.03%, the lowest in Freddie’s survey history dating back to 1971.
And, rates are headed even lower. The 15-year fixed-rate is bound to be under 2% by year’s end. The 30-year fixed will be under 2% sometime next year.
Let’s look at the trendlines.
Mortgage rates tend to follow the 10-year Treasury rates. These days mortgage rates are running much higher than they’ve been averaging.
Consider this math. I tracked the average 10-year Treasury rate from the middle of each June (not the average of the month) from 2010 to 2020. The 10-year Treasury rate averaged 2.24%.
Separately, I took the Freddie Mac’s 30-year fixed rate from its true monthly average data set for each June, from 2010 through 2020. Freddie Mac’s 30-year fixed averaged 4.013% over that same June timeline, meaning its mortgage rates have been running about 1.773% higher than the 10-year Treasury rates.
Fast forward to now. This week we find the 10-year Treasury rate is 0.67% and Freddie’s 30-year is 3.03%. That means mortgage rates are an average 2.36% higher than the 10-year Treasury. If we apply the 1.773% average mortgage rate calculated from the June 2010 to June 2020 data set, rates should be averaging 2.443%. That is a far cry (more than ½ point higher in rate) from today’s Freddie rate of 3.03%.
At the same time, America is shutting down again with the resurgence of COVID-19. How much wherewithal will companies and individuals have to absorb the financial and emotional toll of stop-start-stop?
With such low interest rates, the mortgage industry is charging more points and fees to boost profits as seen in the Mortgage Bankers Association report June 12, which shows quarterly production revenues were up roughly 10%.
Mortgage application lines are long. The process can be particularly condescending and humiliating (proving your job and/or your company income is ongoing amid the COVID-19 backdrop). If your loan is getting funded in 30 days or less, consider yourself lucky. In some cases, it’s taking three or four months, according to some of my industry colleagues.
As those lines thin out and competition becomes a larger issue again, lenders will sharpen their pencils. They will offer more aggressive pricing and fewer points, in part by reducing their profit margins. We’ll eventually get back to the 10-year Treasury rate plus 1.773% for 30-year mortgage shoppers.
“Rates will grind lower,” said Seth Sprague, principal at Stratmor Group. “Loans will get harder to do as the economy isn’t opening up.” He thinks increasing capacity — recruiting and training new employees and technology — will help close more loans.
“Expectations are that rates will go down over the next year,” said Guy Cecala, editor and publisher of Inside Mortgage Finance. “There is 100 basis points of extra margin built into the system now.” (Here’s an example: 100 basis points on a $400,000 loan is 1% or $4,000.)
I’m already receiving at least one daily California lender rate sheet offering 30-year fixed-rate mortgages at 2.25%. California mortgage rates tend to run lower than Freddie Mac’s national survey average rates due to larger average loan sizes, albeit with too many points to pull the trigger.
Regardless, we continue to fund the 30-year fixed loans in the 2.75% range with low points and fees. And, 15-year mortgages are funding at 2.25% with low points and fees.
Not everybody agrees.
Dr. Raymond Sfeir, director, Anderson Center for Economic Research at Chapman University, expects the 10-year Treasury rate to go higher by the end of the year barring another COVID-19 wave. “I expect an economic recovery in the 3rd and 4th quarters of this year assuming we don’t have a second wave in the fall.”
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