So long, low mortgage rates

“The only function of economic forecasting is to make astrology look respectable.”

That’s according to no less an authority than legendary economist John Kenneth Galbraith.

It’s a funny line because it contains a kernel of truth. But some economic indicators are so reliable, and some patterns so established that they can predict exactly what’s going to happen.

For instance, if oil prices rise from $80 to $90 a barrel, then gas prices are nearly certain to go up within a week or two. Most people pay attention just to the price of a tank of gas – not to its precursor. But ”West Texas Intermediate” crude oil prices are a reliable indicator of what we’ll pay at the pump.

The same goes for the mortgage market and the interest rate on the 10-year Treasury bonds. As oil is to gas, 10-year Treasury rates are to mortgage rates.

I’ve been watching the 10-year Treasury bond and what it’s yielding. In early May, the yield was 1.6 percent. So, if you were to buy a new bond at that level you would get paid 1.6 percent on your money each year for 10 years. At the end of 10 years, the government would pay you back your full principal.

By the end of May, that rate had risen to more than 2.1 percent. That’s a full half percent. That may not seem like a lot, but that’s a 32 percent rise in just a couple of weeks.

The reason? The Federal Reserve (the central bank for the entire U.S. banking system and economy) has begun to hint at allowing short-term interest rates (the ones they have the most control over) to go up.

Since the financial crisis, the Fed has done everything in its power to keep interest rates as low as possible. That has allowed rates on government bonds like the 10-year Treasury to drop well under 2 percent. (A rate of 4 percent is closer to normal.) The Fed’s action has brought mortgage rates to historic lows.

When the Fed lowers short-term rates, the 10-year bond yield drops. Then, mortgage rates drop, as well. It’s Econ 101. The Fed says they will keep rates low for the foreseeable future, and the 10-year yield drops even more. Happily for all, mortgage rates drop even further.
As of last April, the average 30-year mortgage was about 4 percent. Because rates (last year) stayed persistently low, the average 30-year mortgage this April was under 3.5 percent!

Now, because the economy and the job and housing markets have recovered to some extent, the Fed may begin to slow down all the measures they have taken to keep rates low.

This May, rates on the 10-year shot up. As predicted, mortgage rates have already started following suit. As of June 7, the average 30-year mortgage stood at nearly 4 percent. That upward trend (from 3.5 to 4.0) will likely continue over the coming weeks and months.

Now that rates have bounced back up to the 4 percent level, applications to refinance mortgages have already begun to drop.

So, this may be the end to the very lowest mortgage rates in history. If you haven’t already refinanced an existing mortgage, the window may be closing.

If you haven’t already bought a house, I think there’s still time to get a mortgage rate in the low 4 percent range – but don’t expect that to last forever.

Thinking of doing a re-fi? Don’t delay. Thinking of buying a home? Start shopping soon.
All good things come to an end, and the lowest mortgage rates in history may soon be nothing but a memory. The recent movement on the 10-year Treasury clearly tells the story. Not all economic precursors are this reliable, but this is one you can’t ignore.

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