We have just hit the worst levels we have seen since January 2014 in the mid to high 4% ranges (depending on credit scores). Let’s dive in and try to figure out what is going on.
Before we go into where we are today, I want to take a little bit longer perspective on the history of mortgage interest rates because we have really been spoiled over the last 10 years with 30 year fixed rates below 5%.
The chart below shows the 30 year fixed mortgage interest rate going back to the early 70s. You can see that if you took an average through that whole trend line, the 30-year average is still above 7.5% going back over that time horizon.
Today we are a long way from that 7.5% average and we are a very long way from some of the crazy interest rates that we saw in the 80’s. However, this trend of downward interest rates seems like it might be starting to reverse.
The chart below was one that Freddie Mac put out earlier this year. This was their estimate as to where interest rates would be by the end of 2018. Their estimate was 4.1% in quarter one of 2018. I am sorry to say we’re closer to 4.6% today. So the trend towards higher interest rates is accelerating. Interest rates are definitely starting to climb faster than we have seen in a long time.
Why is that? The top chart (image below) is the mortgage back security trading for the last four years. You can see on the right side of the chart, it’s just this sharp drop-off. What you are seeing is the price of the mortgage back security bonds. Mortgage bonds have an inverse relationship to rates. So as the price of the bond goes down, the corresponding interest rate that a client would receive goes up.
Now you can see the last time we hit these levels was January 2014. That’s the last time we’ve hit this range. Moreover, it looks like this 30 years history or pattern of rates going down might finally have reversed course with rates going higher.
Why have rates changed direction so suddenly?
Let’s check in on with what the Fed is doing, in the 4th quarter of 2017 they started to unwind their assets – take a look at the QE Unwind graph. During the Financial Crises the Federal Reserve bought over four trillion dollars’ worth of bonds, these were U.S. Treasury bonds and mortgage backed securities. This buying of bonds brought down long term interest rates globally and made it easier for companies and individuals to invest in their businesses and buy homes.
They have since quit buying mortgage-backed securities, which is the precursor for interest rates and they have begun to let those bonds that are maturing fall off. That means there is excess liquidity coming into the market and the Fed is no longer a buyer.
There’s not enough demand to buy those bonds without the Fed and so in order to get enough demand, the market is asking for higher interest rates before they will absorb that extra liquidity of bonds.
The Federal Reserve still has over four trillion dollars in assets that they need to off load. If this trend continues, it looks like that is going to really trigger higher long term interest rates in the future.
Josh Mettle is an industry leading author and mortgage lender, specializing in financing physicians, dentists, CRNAs, and physician assistants. You can enjoy great physician real estate and mortgage advice here or by visiting his book site. Josh is also a fourth generation real estate investor, and owns a number of rental homes, apartment units and mortgages. Josh is dedicated to helping physicians become more financially aware and able; listen to “Physician Financial Success” podcast episodes or download Josh’s latest tips and advice here.
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