Historic mortgage rates herald momentous change

The interest rate on the 30-year fixed rate mortgage (FRM) dipped below 4% in November 2011, marking the second time in history that 30-year FRM interest rates have broken the 4% floor — the first was just one month prior. Thus, mortgage rates are literally at all-time lows, leaving many to wonder what the implications are for the housing market and the economic recovery altogether.

first tuesday take: News of the historic low in the 30-year FRM has reverberated around the globe. We are not really sure why since it tells us little that we didn’t already know — interest rates are really low. The other fact this news confirms is that interest rates have nowhere to go but up.

Historically, the 30-year mortgage rate runs at a 1.5% spread over the 10-year Treasury Note (T-Note), which is currently at 2%. Thus, mortgage rates could conceivably fall as low as 3.5%. However, rates are not likely to fall below 3.87% as this is near the current nominal rate of inflation, a threshold which lenders will not breach. [For more information on the rates affecting real estate, see the first tuesday Market Chart, Current market rates.]

Consequently, the real rate of return (ROI) on conventional 30-year mortgages in today’s market is approaching a net-zero investment for mortgage investors. Due to myriad social and economic issues that first tuesday has addressed extensively since the dawn of the Lesser Depression, these economic realities will remain into 2014, and side effects will be felt until 2016. [For more information on the market factors driving interest rates, see the first tuesday book, Economic Trends in California Real Estate, First Edition.]

However, after the monetary magicians are satisfied with consistent and predictable gross domestic product (GDP) growth, interest rates will be driven back up when the Federal Reserve (the Fed) sells long-term bonds at high yields to forestall dangers of hyperinflation, thus pulling back the cash they injected into the markets to get us out of this Lesser Depression. The confluence of interventionist monetary policy, increased GDP and a rising rate of inflation will result in an environment of rapidly rising mortgage rates á lá 1980, though not nearly as extreme. [For more information on the effect of monetary policy on the real estate market, see the July 2011 first tuesday article, The Fed’s monetary policy, straight from the horse’s mouth.]

When this occurs, the game will change and an entire generation of real estate brokers and agents with no experience in an environment of rising mortgage rates will scramble to answer the number one question of their clients: “How can I assume the seller’s low-rate loan?” Unfortunately, unlike in 1980, the answer to this question is:  “You can’t.” [For more information on how the due-on clause negatively affects home sales, see the March 2011 first tuesday article, The due-on-sale clause: barricading homeowners since ’82.]

This cohort of real estate professionals, who cut their teeth on easy financing at low rates (now tight financing but still at low rates) for the past 25 years, must begin educating themselves about the key tool of lender dominance: the due-on clause. After learning (in 2015-2016) of the great weight the due-on clause pulls in a rising interest rate environment, the next step will be twofold: discover the techniques for avoiding due-on enforcement and use the political cache of power coalescing in the Occupy Wall Street (OWS) movement and its variants to marshal a successful reform of this formidable aspect of lender dominance. [For more information regarding the due-on clause, see the first tuesday book, Real Estate Finance, Sixth Edition; for first tuesday’s take on OWS see the October 2011 first tuesday article, Occupy Wall Street: where are the Realtors?]

re: “Mortgage rates below 4% for a second time” from the Wall Street Journal