The mortgage rate has never been lower. She derives from Freddie Mac’s weekly primary mortgage market survey. As of October 22, 2020, Freddie Mac reported that rates on the 30-year fixed-rate mortgage (FRM) had come down to 2.8%. The rate on the 15-year mortgage was reduced to 2.33%. Both had additional fees and mortgage points, which was 0.6% of the mortgage amount.
A 5/1 adjustable rate mortgage (ARM) often has an initial interest rate that is lower than a fixed rate mortgage. However, Freddie Mac reported that the 5/1 ARM rate was 2.87% higher. Its fees and mortgage marks were down 0.3%.
As the chart above shows, mortgage rates have decreased significantly compared to the previous year. A 30-year fixed rate mortgage from a year ago charged an interest of about 3.7%, which is about 1.5% higher than today’s rates. On a $ 300,000 mortgage, today’s low rate turns into savings of about $ 225 a month before factoring in taxes.
Mortgage Rates at Historic Rates
Freddie Mac’s PMMS dates back to April 1971. For the history buffs among you, the 30-year fixed rate mortgage rate on April 2, 1971 was 7.33%. It hit its high-water mark at unimaginable 18.63% on October 9, 1981. To put that number in perspective. At today’s rate, the principal and interest on a $ 300,000 30-year mortgage would be $ 1,159 per month. At the prevailing rates in October 1981, the monthly payment on the same home loan would be $ 4,676.
A chart by Freddie Mac shows a drop in rates over the last four decades.
Note that Freddie Mac did not track 15-year mortgages until 1991 and 5/1 hybrid ARMs until 2005.
Lower rates drive higher housing costs
One of the many things learned from Warren Buffett is that low interest rates drive up asset prices. This is certainly true in the housing market. As reported by a Forbes consultant, single-family home prices rose in 174 of 181 metropolitan areas over the previous year. Some regions have seen an increase in double digits. For example, Huntsville, Alabama saw a 13.5% increase in single-family homes.
Recently, the National Association of Realtors reported this month that current home sales increased for the fourth consecutive month. As of September, sales grew at a seasonally adjusted annual rate of 6.54 million, up 9.4% from a month earlier and about 21% from a year earlier. At the same time, the average current home price was $ 311,800, about 15% from a year earlier.
Low cost is not the only driver behind the rise of housing costs. As NAR reported, the total housing inventory declined by 1.47 million month-on-month and year-over-year. The NAR said it was at a record low that at current prices it is sufficient to last just 2.7 months. Mark Zandi of Moody’s Analytics also cited moving from urban centers to single-family homes in the suburbs as a factor in increasing housing costs. Both the change in the working system from home and the desire to get out of the densely populated have inspired this change.
Refinancing has also increased due to lower rates. According to The Washington Post, a key metric, which shows that homeowners mortgaged reached their highest level in 16 years. According to mortgage data analytics Black Knight, prepayment activity reached more than 3% of all mortgages, up 12.7% from the previous month.
Low rates can also make refinancing attractive to those who buy or refinance a home just one year ago. As noted above, today’s low rates can save a borrower at $ 200 at a rate of $ 300,000 per year. According to the Mortgage Bankers Association, the amount of mortgage applications decreased by 0.6% from the prior week on a seasonally adjusted basis. This may be due in part to higher housing costs. Nevertheless the refinance index saw a 0.2% increase over the previous week and 74% higher than a year ago.
Kovid-19 cannot slow down housing boom
The housing market is one of the few economic bright spots during the Kovid-19 induced recession. The rise in housing costs raises the question of whether we are in another housing bubble reminding us of the 2007 crisis. The real estate business inherently rejects the idea of a housing bubble. While they acknowledge that there is excess in some markets, they believe it is driven by high demand and low supply. Numbers support this theory.
At the same time, one cannot help recalling these words: “Those who cannot remember the past, condemn it to be repeated.”