Mortgage rates drop again

As the yield on the 10 year US Treasury continues to drop, so do mortgage rates, which are now around 3.5% and very close to the all-time lows of 2013.

I last wrote on mortgage rates in May in a post Mortgage rates still headed lower and I post an extract from that article below. This week the Federal Reserve once again indicated less enthusiasm for raising short-term rates for a number of reasons. One the Fed did not mention – and neither did any commentator I read – is the impact the November Election is having on the economy.

It seems pretty obvious to me that the possibility of a giant step into the unknown and unpredictable must, at some point, have an impact on investment decisions, thereby causing some slowing in economic activity.

Why are the “experts” so wrong?
The FRM is based, not on short-term interest rates over which the Federal Reserve has influence, but on the yield on the 10 year US Treasury (10T), whose price is influenced by a number of factors, notably the anticipated strength of the economy, yields compared with other countries, and geopolitical developments around the world.

When the Fed increased short-term rates last December, the yield on the 10T was 2.25%. On Friday it closed at 1.6%, a drop of 0.65%. In the same period, the FRM has dropped just 0.4%.

The reason the Mortgage Bankers Association keeps getting the forecast for the FRM so wrong is that it keeps forecasting that the yield on the 10T is going to increase. Its latest FRM forecast – published in May – assumes a 10T yield of 2.2% by the end of 2016 and 2.9% by the end of 2017. These forecast rates have dropped from 2.7% and 3.3% just since January.

But it is not just the MBA that gets interest rates wrong. The Fed was so concerned about being “transparent” and explaining, ad nauseam, its thinking on interest rates in order not to “surprise” the market, that it missed the opportunity to raise rates when the US economy was strong and did so just as it became apparent that the continued weakness in the rest of the world was leading to lower interest rates elsewhere, not higher.

Interest rates have long been higher in the US than in most of the rest of the world, leading to demand for US Treasuries from overseas and causing the dollar to strengthen dramatically.

In my comment on the Fed’s increase in December I wrote: “If commodity prices remain weak, there will be a significant deflationary impact felt in several countries; China’s slowdown could continue to be a drag; and of course there is always the risk of a major war or confrontation. The US economy is doing quite well, but will not be immune to what is happening elsewhere in the world.”

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Andrew Oliver is a Realtor with Harborside Sotheby’s International Realty. Each Office Is Independently Owned and Operated

@OliverReports