And They Keep Going Lower

Last week, we asked “how low can they go?” We find out this week that they can go lower.

Of course, we're referring to mortgage rates. The trend in rates remains downward sloping, which is no surprise. Over the past five days, the 10-year U.S. Treasury note chipped off another 15 basis points, which means the yield on this influential long-term lending benchmark is below 1.75%.  The rate on a prime conventional 30-year mortgage will hover two percentage points higher (give or take a few basis points) than the yield on the 10-year note.

Most of the national mortgage surveyors report best rate execution on a 30-year conventional mortgage below 3.7%. This is about it where it was this time last year. We see similar drops in the 15-year loan and, to a lesser extent, the 5/1-year ARM.

Lower lending rates have been good for business. The Mortgage Bankers Association's latest survey shows refinances up 16% week over week. A meaningful gain was also reported on purchase applications, which were up 7%.  When the MBA reports for this week, we expect to see a further increase in weekly activity.

Low rates are a nice stimulant, at least for the short term. But as we mentioned last week, we really don't like the idea of the 30-year fixed-rate mortgage hanging this low indefinitely. The problem is that low rates frequently come encumbered with discouraging economic news.

Indeed, that's the case. Stocks around the world continue to sell off; commodity prices continue to fall. Oil is the number one commodity everyone focuses on, and it has recently been quoted below $28/barrel. This is good news when we fill up at the gas station. It's less welcomed news for U.S. oil producers, many of whom are drowning in debt that they can no longer service.

Stocks and commodities are trending lower over fears the world's major economies – including our own – are slowing, and could slow to the point of recession. Investors, in turn, have taken haven in U.S. Treasury securities and other government debt. Bloomberg reports that $7 trillion of sovereign government debt, roughly 30% of all government debt worldwide, now yields a negative interest rate. This means many investors aren't even seeking a return; they're simply seeking a place to warehouse their cash.

So, yes, low rates are nice, but an improved economic outlook would be even nicer.  After all, we are one big inter-dependent economic family.  For now, it appears today's low mortgage rates will remain.

Information provided by Jessica Regan.

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