What does the return to lower mortgage rates really mean? Loaner

Recently, many people have argued that we will not return to lower mortgage rates.

That it is not possible to return to low mortgage rates.

The thing is, when they say that, they always think of 3% mortgage rates, maybe 4%.

In reality, mortgage rates could fall significantly from current levels while remaining much higher than they were previously.

Simply put, they can go down without being considered “low” again.

Remember when a 4.5% mortgage rate seemed very high?

A few years ago, a friend of mine bought a house and took out an adjustable rate mortgage (ARM).

At the time, he got a rate of 4.5%, which at the time seemed very high. Not at all attractive.

And again, it was an ARM, so it’s not like it was a slightly more expensive 30-year repair. Its price was both higher than everyone was accustomed to and it hadn’t been repaired in over five years.

At the time, 4.5% seemed very high. For what? Because we were used to prices in twos and threes.

A few months before he fixed his rate, you could still get a 30-year rate set at 3.25%.

So it’s always relative to what you’re used to. And he and everyone else were used to seeing rates starting with 2 or 3.

I wrote a while ago that once we saw higher rates, our brains would think that a rate of 5% or 6% would actually seem pretty okay.

And now, looking back, that couldn’t be more true.

What does a 5% mortgage rate look like today?

If you presented someone with a 5% mortgage rate today, they would probably say that looks really good.

This is simply because they have seen rates starting with seven or eight recently.

So why wouldn’t it be interesting to see something that starts with five? Maybe even a six at this point.

This is the exact opposite of what happened when we went from mortgage rates of 2% and 3% to mortgage rates of 6%.

This is the positive side that is currently working in favor of mortgage rates.

Human psychology has a way of making things not seem so bad after you’ve experienced much worse.

A year ago, the 30-year fixed rate hit a near 21st century high of 8%. Then, rates rebounded and fell to around 6% in September.

For the record, this peak was 8.64% during the week of May 19, 2000, according to Freddie Macand we never really got there (peak at 7.79% at the end of October 2023).

They have since rebounded to 7%, likely due to Trump winning a second term as president and many expecting higher inflation under his leadership.

Where they go from there is another question, which I’ve also talked about before.

What I Mean When I Say Mortgage Rates May Go Down

Now let’s return to this question of “inferior”.

Whenever I talk about mortgage rates today, I present them based on recent levels. Although this may seem obvious, it often seems to elude people.

So if I say that rates can go back down or go down from now on, that doesn’t mean going back to 2% or 3%.

It just means they can go back down by, say, 6% or 5%.

The idea here is that this isn’t a crazy return to what now seem like unsustainably low rates.

It’s simply a return to something in between. And when you think about it, something in between seems pretty darn reasonable.

A bit like Goldilocks. Neither too high nor too low. Maybe just!

Not so high as to make housing prohibitive and out of reach for everyone.

But not too low that demand picks up and property prices soar.

Granted, there isn’t a strong correlation between house prices and mortgage rates anyway.

But that’s what’s been happening lately, given low rates. Remember, they may collapse if the economy weakens and fewer buyers are willing or able to purchase a home.

Of course, it’s not really up to us to decide the next direction of rates, nor to the Fed for that matter. The direction of mortgage rates will depend on the relative strength or weakness of the economy.

The amount of government spending in coming years could also play a role, as increased bond issuance could cause bond prices to fall, leading to higher interest rates to compensate.

Let’s just hope that rates find a good place that leads to a better balance in the real estate market, where buyers and sellers can once again transact in a healthy manner.

Continue reading: How to track mortgage rates.