The 30-year fixed rate now stands at 2.73%, as other rates also hover at lows.
By Manuel Gutierrez, Consulting Economist to NKBA
Mortgage rates remained virtually unchanged last week. The bellwether 30-year fixed-rate fell four basis points to 2.73% from 2.77%, a drop unlikely to drive any additional business in the housing industry.
Shown in the small green chart in Figure 1, the most recent mortgage rates are at their lowest historical levels. Even when compared with a year ago, the fixed mortgage rate has dropped nearly three-quarters of a percentage point.
These declines have occurred despite an environment of strong interest in housing that would suggest higher demand for mortgage loans, which would have normally pushed interest rates higher. Sales of new and existing homes each increased last year. A total of 5.64 million existing homes were sold in 2020, up 5.6% over the prior year. An additional 811,000 new homes were sold, up a whopping 18.7% over 2019.
The Fed’s policy of flooding the market with liquidity has kept the Federal Funds rate extremely low, down to nearly zero over the last decade. The Federal Reserve Bank has affected this policy mainly by purchasing two types of liabilities. One includes securities issued by the Federal government, and the other is mortgage-backed securities.
Over the last year, the Fed has increased its holdings of U.S. government securities by over $1.3 trillion, which is almost half the government’s deficit. In other words, the Fed is monetizing a large portion of the debt. If it weren’t following this path, it would have to pay higher interest rates on the Treasury securities it issues.
Along with the decline in the 30-year fixed rate, the rates of all other types of loans have also declined. For instance, the rate on 15-year loans is down by 77 basis points over the past year, from 2.97% to 2.21% last week.
Adjustable-rate loans though, such as the “5/1 year ARM” shown in Figure 2, have dropped by less than half a point.
How long interest rates will remain this low can’t be predicted. However, the over-budget funds that the Federal government plans to spend this year, including the $1.9 trillion coronavirus stimulus package, will only put more pressure on the Fed to purchase additional government securities to maintain its low-interest-rate policy.
