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Time May Be Running Out For Super-Low Mortgage Rates

To take a step back from week-to-week news for a moment before moving on to recent developments, a little historical perspective reveals just how low mortgage rates are these days. For a month-and-a-half now, thirty-year mortgage rates have been below 6.0%. How low is that? In thirty-six years of mortgage data, there have only been three years in which mortgage rates averaged below 6.0%. In none of those three years, did those rates stay below 6.0% for the entire year.

In other words, history is clear on two things:

  • Current mortgage rates are low
  • Low mortgage rates don’t stay around for long

This history lesson gives added power to some recent developments:

It all adds up to reinforce the importance of taking advantage of low interest rates as soon as they become available.

Inflation Pushes Interest Rates

What the oil price and CPI developments have in common is that they are both examples of inflationary pressures. Oil has become something of a bell-cow for overall inflation: where it leads, other prices tend to follow. This is understandable. An isolated oil price shock or two can be readily absorbed by other segments of the economy, but the type of steep, sustained rise in oil prices that we’ve seen in recent years becomes a cost factor that has to be passed on. As a result, it is not just energy prices that are on the rise.

January’s move in the CPI is evidence of these broader pricing pressures. A 0.4% increase may sound innocuous enough, but it projects out to a 4.9% annual rate of inflation. This is even higher than last year’s 4.1% inflation rate, itself the highest since 1990. On the heels of last year’s rise in inflation, January’s figure looks more like the continuation of a trend than an aberration.

What makes all of this important to mortgage shoppers is that inflation puts direct, upward pressure on interest rates. So, even though mortgage rates have fallen a long way in recent months, inflation has been headed in the opposite direction. The two would seem to be on a collision course.

Long vs. Short Rates

The impact of this can be seen in the bond market. As much press as Fed Chairman Ben Bernanke’s feverish interest rate cuts have garnered, yields on intermediate and long bonds have actually been rising over the past month. In other words, even while short-term interest rates have been falling, long-term rates have been rising. This once again demonstrates the limitations of the Federal Reserve’s powers. They can set short-term rates, but long-term rates are set by the marketplace, and the market is concerned about inflation. What mortgage shoppers need to remember is that mortgage rates are influenced more by long rates than by short rates.

The bottom line is that anyone who has thought about refinancing a mortgage or buying a home had better get in the game now, because rates may not be staying low for long.

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3 Responses to “Time May Be Running Out For Super-Low Mortgage Rates”

  1. Hardy Says:

    The survey showed that the 30-year fixed-rate mortgages (FRM) had an average interest rate of 5.48 percent with 0.4 point during the week compared to an average of 5.69 percent with 0.5 point a week earlier. One year ago the 30-year FRM stood at 6.25 percent. The January 24 number was the lowest the 30-year FRM has been since the week ended March 24, 2004 when it averaged 5.40 percent

  2. richard Says:

    Yes, those rates were extraordinarily low, and as expected, they proved to be short-lived. The fundamental problem remains that it is difficult to reconcile the level of mortgage rates with current inflation pressures. In short, even after bouncing back up above 6.0%, interest rates may still be a bargain, and bargains generally have short shelf lives.

  3. Fha Bond Says:

    Thanks for creating this blog. I thought it was a very interesting read. It is so interesting reading other peoples personal take on a subject.

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