Over the past few months, borrowers have been experiencing historically low mortgage rates. Over the last fifty years, the average on a Freddie Mac 30-year fixed-rate mortgage has been 7.76%. Today, that rate is 3.02%, rising almost 30 basis points in the past month. Flocks of homebuyers had been taking advantage of the continuously dropping low rates over the last twelve months, however those numbers are beginning to level. As we have seen throughout February, however, there is no guarantee rates will remain low for much longer.
Whenever we try to forecast mortgage rates, we should consider the advice of Mark Fleming, Chief Economist at First American:
“You know, the fallacy of economic forecasting is don’t ever try and forecast interest rates and/or, more specifically, if you’re a real estate economist mortgage rates, because you will always invariably be wrong.”
Many things impact mortgage rates. The economy, inflation, and Fed policy, just to name a few. That makes forecasting rates difficult. However, there’s one metric that has held up over the last fifty years – the relationship between mortgage rates and the 10-year treasury rate. Here’s a graph detailing this relationship since Freddie Mac started keeping mortgage rate records in 1972:
There’s no denying the close relationship between the two. Over the last five decades, there’s been an average 1.7-point spread between these two rates. It’s this long-term relationship that has some forecasters projecting an increase in mortgage rates, especially given recent comments, as we move throughout the year. This is based on the recent surge in the 10-year treasury rate shown here:
How high might they go in 2021?
No one knows for sure. Sam Khater, Chief Economist for Freddie Mac, recently suggested:
“…the rise in mortgage rates over the next couple of months is likely to be more muted in comparison to the last few weeks, and we expect a strong spring sales season.”
What does this mean for your clients?
Whether it’s a a first-time buyer or someone looking to upgrade to a more spacious home in the same community, even an increase of half a point in mortgage rate (2.81 to 3.31%) makes a big difference. On a $300,000 mortgage, that difference (including principal and interest) is $82 a month, $984 a year, or a total of $29,520 over the life of the home loan.
Based on the 50-year symbiotic relationship between treasury rates and mortgage rates, it appears mortgage rates could be headed up even further this year. While this may cause some buyer traffic to decrease, those with ample cash reserves or looking to relocate in lower-price regions will most likely continue to shop aggressively.