Since about 2008, homebuyers and homeowners have enjoyed the lowest mortgage rates in the history of mortgages. Some 15-year fixed programs got as low as the mid-2 percent range for a while. Rates are not that low anymore but they remain at very low levels.
For the most part, this was driven by the intervention of the Federal Reserve Bank purchasing over a trillion dollars of mortgage-backed bonds. This injection of cash kept demand high and mortgage rates low when there were few other buyers.
But the Fed has been winding down this program, and currently is purchasing about a quarter of what they once were, and plans to be out of the mortgage bond business by this fall, probably by October.
Yet, this withdrawal of easy cash has not yet had a huge impact on rates, surprising many analysts and mortgage industry insiders. We honestly had expected to see rates rise much more rapidly.
The primary reason for this is there are now a lot of other buyers for these securities that were not active for the past few years. Mortgage-backed securities are for the most part fully backed by the federal government, enjoy good liquidity and pay a yield greater than that of government bonds. In short, they aren’t a bad deal in times of uncertainty. With the overall rise in real estate values and the stock market, more people and institutions have more cash to invest somewhere. A lot of mattress money has come out of hiding recently as well.
And if you follow the news, uncertainty does abound. The stock market still is having its share of bad days and the situation in the Middle East is tense on many fronts. Relations between Ukraine and Russia cast questions over the stability of about one-third of European natural gas supplies. All of these impact the level of comfort of investors and many seek safety in mortgage backed bonds. This inflow of cash has to a great deal offset the reduced level of investment by the Federal Reserve.
The fact that the Fed is backing out of playing with mortgage rates also makes investors happy because yields earned are more reflective of the market driven demands than being artificially tamped down by truckloads of freshly minted bills.
But, global cycles are just that — cyclical. In due time everything goes around and eventually rates will rise back up. In the last 30 years, I have seen mortgage rates from as low as 2.5 percent to as high as 19 percent.
Purchasing a home is more affordable than ever. Consider that a $250,000 loan at 4.25 percent costs $1,229 per month for principal and interest. At 7 percent, it costs $1,663 — that is over $5,200 a year difference. And I recall when people were delighted to get 7 percent, having been paying interest in the 8 percent range for years.
Chris Neuswanger is a mortgage loan originator with the Macro Financial Team at Mac5 mortgage in Avon and may be reached at 970-748-0342. He welcomes mortgage related questions from readers.