Current mortgage rates: nearing absolute zero?
September 15, 2011
Six percent mortgage rates were cheap. Five percent mortgage rates were unheard-of. Now, current mortgage rates seem to be heading toward 4 percent, raising the natural question: Can they go even lower?
It's an interesting question--and a tricky one. Financial markets can reverse course without warning. Waiting on the sidelines because you think new home mortgage or refinance rates could go lower could prove to be a dangerous game.
Rock bottom for mortgage rates?
Current mortgage rates dipped below 4.5 percent in August, and even got as low as 4.15 percent before bouncing back a little by the end of the month. Since mortgage rates have recently broken every other precedent for how far they can drop, it's natural to wonder whether 30-year rates could get below 4 percent. And what about 3 percent? Or 2 percent?
The problem is, there's a support level for mortgage rates, and it's well above 2 or 3 percent. That support level has something to do with inflation.
You see, lenders aren't going to make loans unless they can expect to get back more than the rate of inflation, and current mortgage rates are rapidly approaching that rate.
According to inflation figures from the Bureau of Labor Statistics which go back to 1947, the average annual inflation rate has been 3.71 percent. Lenders might be willing to extend a lower interest rate than that in a period of especially low inflation, but recent year-over-year inflation has been running at close to this level.
So, absolute zero for mortgage rates lies just below 4 percent--and that's assuming mortgage lenders don't want to earn a premium over inflation, which they do. This means we may already have reached the bottom for mortgage rates.
Along with heavily reduced home prices in many markets, current mortgage rates make housing more affordable than it has been in years. If you can afford to buy a house now, be careful about getting caught waiting for an even better deal. If interest rates move against you, it could be a mistake you regret for years to come.
