Why Mortgage Rates Can Go Even Lower, and What It Means for the Market

When mortgages are near record lows, it seems greedy to ask if rates can go even lower. However, that is becoming a growing possibility in today’s topsy-turvy economic climate.

When mortgages fall, just about everyone but the bank wins. Low rates mean more buyers are in the market, so sellers can offload properties more easily. Flippers and rehabbers low love rates for this reason.

Additionally, low rates mean buyers can afford more house, which is great for buyers because they get more luxury for their dollars. It’s also great for construction workers, building suppliers, and construction companies, because low rates mean there’s more room for buyers to ask for and get upgrades.

With rates so low and everyone profiting, it might seem unlucky to even talk about rates falling even further. Why jinx a good thing? Still, there’s a very good reason to consider the possibility. As low as rates are now, they’re still higher than they should be when we consider two important financial metrics.

U.S. Treasury and Mortgage Spread

Historically, mortgage rates have fallen as U.S. Treasury rates fall. That’s because the cost of capital for lenders is tied to the rate that the U.S. government pays for bonds, and those bonds are paying less and less. As they pay less, that means mortgages pay less, as well.

Treasury rates are now about 2.57% for a 30-year term, which is over 30% less than it was a year ago.

At the same time, mortgage rates have fallen, but not by as much. According to Freddie Mac, mortgage rates in January fell to 3.67%—incredibly low, but only 20% lower than they were in January 2014. This means rates can, at least in theory, fall another 10% to about 3.33%, which would be even lower than the lowest point in late 2012.

Germany and U.S. Bond Rates

With U.S. Treasuries paying less than 3% over the next 30 years, the shorter-term Treasuries are paying even less. They reached a historical low earlier this year, when 10-year Treasuries fell to 1.68%, although that’s now gone up a bit to 2%. While an improvement, 2% is still far below the norm, and even below the post-2008 low rate environment we’ve slowly grown accustomed to.

So it seems that U.S. Treasuries cannot go lower, which is what many pundits and economists keep saying. However, they also said that back in 2013, when rates were 50% higher than they are now.

Can U.S. rates fall further? To answer that, just look at Germany. With an arguably less stable economy more exposed to various risks, the country’s bonds imply a much more stable economy. The German 10-year bond is now yielding 0.32%, which is 83% that of the U.S. If the U.S. Treasury falls to the same rate as the German one, mortgages could crater to levels no one could ever imagine.

What It Means for Real Estate Developers

Uncertainty about falling rates may make some buyers wait a little for lower interest rates, and it may encourage some refinancers to wait before getting a new loan. But the trend towards lower rates sends a clear signal to real estate developers: build, build, and build.

With rates low and falling, the number of people entering the market and the quality of home they are going to get for their money is going to rise. This is going to provide profit those real estate developers who already have projects completed and ready to serve the property-hungry market.

If you have a project that you want to get off the ground in California, Socotra Capital can help. We’ve been helping real estate developers for years and we’re eager to help more developers in this period of real estate expansion.

Your real estate assets are your best investments for the future. At Socotra Capital, we’re proud to be the premier direct hard money lender for California real estate. Contact us today to learn more about how we can help. 

Leave a Reply