Current market rates
The average 30-year fixed rate mortgage (FRM) rate decreased again in the week ending August 7, 2020, now at 2.88%. The 15-year FRM rate also decreased to 2.44%. FRM rates have descended to historic lows due to efforts to stimulate lending during today’s unstable economic times. Beginning in March, the Federal Reserve (the Fed) dropped their benchmark interest rate to zero and began purchasing mortgage-backed securities, fulfilling their role as the lender of last resort to ensure mortgage originations continue. As a result, interest rates will continue their gradual decline over the next several months. FRM rates are also tied to the bond market, tending to move in tandem with the 10-year Treasury Note (T-Note) rate. The 10-year T-Note recently plunged to its lowest rate on record, at 0.54% as of July 31, 2020. Bond market investors are reacting to the gutted economy and the expectation of a continued halt to many business activities. This has led them to accept significantly lower yields in return for the safety of treasuries, which in turn has pulled FRM rates down in recent weeks. FRM rates will remain low over the next two-to-three years.
The spread between the 10-year T-Note and 30-year FRM rate is 2.34%, well above the historical difference of 1.5%. The higher margins seen through much of 2018-2019 and rising in 2020 signify that mortgage lenders are padding their risk premiums on top of restricting mortgage credit. Now, the only player able to move FRM rates lower is the Fed, which may be accomplished by a combination of the Fed “going negative” and the extreme purchase of mortgage backed securities (MBS) the Fed is currently undertaking. The average monthly rate on ARMs was 2.94% in July 2020, still above its low point of 2.49% experienced in May 2013. The average ARM rate is just below the average 30-year FRM rate, making these riskier mortgage products less appealing. Therefore, ARM use will remain low over the next couple of years, as the Fed will work to keep interest rates on FRMs low. At the end of March, yields on short-term treasury bills went negative, indicating a strong expectation that the Fed will also go negative this year, which will translate to even lower mortgage interest rates.
The economic slowdown that began in 2019 is accelerating downward in 2020. Social distancing orders have caused economic activity to spiral, resulting in lost jobs and less willingness to take on large purchases. Many homebuyers and sellers are hitting pause on their plans and today’s low FRM and ARM rates won’t be enough to stem the outgoing tide. Expect home sales volume to continue down in the months ahead, reversing course once the recovery is underway, not to even begin until 2022-2023.