Interest rate environment to enter unknown territory
Mortgage rates have fallen sharply, so many interest rate buyers assume they can’t go any lower.
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Frankly, the US economy is in uncharted territory, the terms of which could mean the lowest mortgage rate ever.
Recently, mortgage interest expert Barry Habib predicted mortgage rates would fall to “the lowest they’ve ever been.” At the time, it just seemed like a clickbait claim.
Now it seems strangely prescient.
The spread between two major interest rates reversed on Wednesday, August 14, 2019. Here’s why that seemingly insignificant phenomenon could lead to ultra-low mortgage rates, arguably the lowest ever recorded.
What’s so bad about a ‘yield curve inversion’?
In short, yield curve inversion is a big deal because it is very good at predicting impending recessions.
In fact, it accurately predicted the last seven.
And with recessions usually come very low interest rates (more on that later).
A yield curve inversion has accurately predicted the last seven recessions.
In a normal world, a 10-year US Treasury bond will pay investors more than the 2-year.
That makes sense. In exchange for holding your money longer, you get a greater “yield” or interest rate on that bond.
A yield curve inversion is when short-term bonds pay more than long-term bonds. In this case, the 2-year bond pays more than the 10-year bond. This has happened prior to every recession in recent history.
But why should a short-term bond pay more? Well, the markets believe that the government will intervene soon and cut long-term interest rates through stimulus measures. No one wants to commit to a 10-year loan when things are so uncertain.
And this brief but significant reversal occurred on Aug. 14 and could usher in a new era for mortgage rates.
Why could interest rates fall much lower after yield curve inversion?
As mentioned above, the US economy is entering uncharted territory.
Never before rates already was so low when fears of a recession hit.
Check out the chart below. Every time there is an inversion of the yield curve, the interest rate falls in the coming years. But it seems the rates have nowhere to go. Or do they?
In 2006, with a strongly inverted yield curve, the 30-year mortgage rate was above 6%, according to Freddie Mac. At that moment That were the lowest pre-recession mortgage rates since Freddie Mac tracked data.
Now we’re seeing another inversion, but prices are at an almost unbelievably low level of 3.6%, again using Freddie’s data.
The following chart shows yield curve inversions since 1987. Wherever the 2-year/10-year spread falls below zero (indicated by boxes and an arrow below), a recession eventually follows (shaded areas).
So what happens to mortgage rates after a yield curve inversion? In 2009 and after, we saw mortgage interest rates fall to about half their pre-recession levels, with only 3.32% in December 2012.
But where are mortgage rates going now that they are already at an ultra-low 3.6%? If the rates follow the same pattern this time around and halve again, we’re looking at a 1.8% 30-year fixed loan.
If the interest is halved again, we have a loan of 1.8% with a term of 30 years.
A mortgage rate of less than 2% seems unlikely in today’s world. But keep in mind that a Danish bank already offers negative mortgage interest, and $15 trillion in government bonds worldwide are already “paying” negative yields.
The US may not be far behind that trend. According to Bloomberg, former Fed chief Alan Greenspan says, “There is no barrier to US Treasury yields going below zero.”
US Treasuries do not dictate mortgage rates, but mortgage rates often follow the same trends. If Treasuries turn negative, we can realistically see 2% rates, or even lower.
After the inverted yield curve, only one thing seems certain: we haven’t seen the end of ultra-low mortgage rates yet.
Do you have doubts about this prediction? Record an already historical figure now
Nobody knows what will happen to the mortgage interest. The inverted yield curve could just be a false alarm. After all, history doesn’t always repeat itself.
If you’re in the no-recession camp, you can take advantage of rates that are already lower than everyone thought they would be right now.
Start at the link below.
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