Way back in July of 2010, I speculated that residential mortgage rates might approach zero before all this is said and done:
Which gets us to the housing market. Just as in the automobile industry, if for different reasons, every last effort is being directed at preventing housing prices from reaching a market equilibrium in the face of massive oversupply and collapsed demand (in the housing market, union labor doesn’t play a role, but banks and the big gse’s, Fannie and Freddie, et al., do–price declines would destroy their balance sheets). Just like after 9/11, the Federal Reserve and Federal Government have massively oversupplied the economy with money and credit. (In the case of the housing market the credit supply is in large measure directed specifically to the market, whereas the automobile industry after 9/11 was the beneficiary of a general oversupply of credit).
So what’s to keep residential mortgage rates from going to zero? Effectively, nothing, particularly in the case of new construction. Housing prices wish to fall. Demand is almost non-existent. There is massive oversupply due to the construction binge of the mid-aughts. The government wants to prevent housing price declines but the market says prices must come down. The only mechanism left is reduced interest rates, perhaps even as low as zero.
Now, according to Freddie Mac, who surveys these things on a weekly basis, residential mortgage rates have hit an all-time low:
MCLEAN, Va., Sept. 8, 2011 /PRNewswire/ — Freddie Mac (OTC: FMCC) today released the results of its Primary Mortgage Market Survey® (PMMS®), showing mortgage rates, fixed and adjustable, hitting all-time record lows amid market and employment concerns and economic uncertainty. The previous record lows for fixed mortgage rates, and the 1-year ARM, were set the week of August 18, 2011. The 5-Year ARM matched its all-time low set last week at 2.96 percent.
- 30-year fixed-rate mortgage (FRM) averaged 4.12 percent with an average 0.7 point for the week ending September 8, 2011, down from last week when it averaged 4.22 percent. Last year at this time, the 30-year FRM averaged 4.35 percent.
- 15-year FRM this week averaged 3.33 percent with an average 0.6 point, down from last week when it averaged 3.39 percent. A year ago at this time, the 15-year FRM averaged 3.83 percent.
- 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 2.96 percent this week, with an average 0.6 point, the same as last week when it averaged 2.96 percent. A year ago, the 5-year ARM averaged 3.56 percent.
- 1-year Treasury-indexed ARM averaged 2.84 percent this week with an average 0.6 point, down from last week when it averaged 2.89 percent. At this time last year, the 1-year ARM averaged 3.46 percent.
I don’t generally care to toot my own horn. I really just try to observe things as they are, and attempt to ascertain from there, where they might be heading. But there is some satisfaction in seeing things head in the general direction in which I expected they would, if for no other reason, than the feeling of analytical validation it provides. Yes, even a Curmudgeon can have feelings.
Real interest rates (nominal rates ex-inflation) are already very nearly zero, if the broad CPI index is used as the metric for inflation. According to the Bureau of Labor Statistics, the immediately preceding year saw a 3.6% increase in the CPI, making a fifteen year ARM carry a negative real rate, and a 30-year fixed mortgage just barely above zero (roughly 0.5%).
Now, there are a gazillion good reasons not to use the CPI as a measure of anything, and further, to marry only long-term inflationary expectations to long-term debt in teasing out the real interest rate investors are willing to accept. But the crude method of simply subtracting the CPI from the nominal rate, no matter the term, gives a fuzzy outline of the true state of affairs. And the true state of affairs is that the housing market is utterly moribund.
Especially with new home financing, it would not surprise me in the least to see in the coming months offers for “zero down, zero percent financing” just like the domestic car companies did after 9/11 crashed the automobile market. Funny thing is, they are still at it today.