The media is abuzz – interest rates are low. They have been surprisingly low all year, as a matter of fact, and have been unusually stable as well. They took a nice dip a couple of weeks ago, and now are skipping along the bottom, apparently happy (for now) in an even lower range. Today, interest rates are running about 0.25% lower than they were a month ago.
What does this mean for you?
Most of my clients have already refinanced, so, well, nothing. But if you haven’t refinanced yet, all is not lost – it’s a good time to give me a call if you want to take advantage of low interest rates. The chart to the right shows trends for A-paper, conforming fixed-rate mortgages for the year.
Most folks seems to ask two questions: What’s happening and what does the future hold?
What’s happening is easy. Unrest in the world and volatility in the stock market are driving institutional investors (who control trillions of dollars) to move some of their money into safe, more conservative investments. One of the most popular such investments is mortgages. An investor who invests in a pool of mortgages has a (pretty much) guaranteed rate of return with no principal risk, and the money is secured by real estate.
However, there are very few homeowners or home buyers taking mortgages out, even at these low interest rates. Yes, values are going up, but the number of purchase transactions is still very small compared to normal years, and refinance activity is very low, since most folks who could refinance did so before. Many of the purchases are all-cash as well, which further reduces mortgage lending activity.
So, we have fewer folks wanting to borrow and more folks wanting to lend. Logic tells us interest rates should go down, and logic is right in this case.
To answer the question about where rates are going, we have to ask ourselves, therefore, are these dynamics likely to change? Will more folks want to borrow, either to buy a home or refinance? Will more (or fewer) investors want to invest in mortgages?
On the refinance side, there are still hundreds of thousands, if not millions of families that have not been able to refinance that will do so in the next year or so, as values rise far enough to give them equity, or as they work through credit issues of the past that have prevented them from doing so before.
On the purchase side, there are millions of families that have delayed buying their first home for years for a variety of reasons. These folks are certain to come back into the market at some point, and many think that with rising housing inventory, a more stable job market, and surprisingly low interest rates, 2015 will be the year.
So the demand for mortgage loans by homeowners does seem to be on the verge of increasing.
As for investors, much will depend on the state of the world and their confidence in the economy. If unrest around the world settles down and the economy continues growing steadily, investors should grow more confident in equities and move money away from mortgages back into stocks.
If more folks want to borrow and fewer investors want to lend, logic tells us that interest rates will invariably rise next year. Admittedly, we’ve been saying that all year long, and we’ve been wrong. But this time, we mean it…