Recently, many people have claimed that we will never return to low mortgage rates.
That there is no possible way we can return to lower mortgage rates.
The thing is, when they say that, they’re always thinking about 3%, maybe 4% mortgage interest rates.
In fact, mortgage rates could fall slightly from current levels and remain much higher than they were before.
Simply put, it can go down without being considered “low” again.
Remember when a 4.5% mortgage rate seemed too high?
Two years ago, a friend of mine bought a house and took out an adjustable rate mortgage (ARM).
At the time, he received an interest rate of 4.5%, which at the time seemed steep. Not attractive at all.
And again, it was an ARM, so it wasn’t like it was a little more expensive to fix for 30 years. It was more expensive than everyone was used to and had not been repaired for over five years.
At the time, 4.5% seemed very high. Why? Because we are used to prices in twos and threes.
Months before interest rates were fixed, you could still get a 30-year fixed rate at 3.25%.
So it’s always about what you’re used to. He and everyone else is used to seeing prices starting with the number 2 or 3.
I wrote a while ago that once we see higher rates, our brain will think that a 5% or 6% rate will actually look pretty decent.
Now, with the benefit of hindsight, this couldn’t be more true.
What does a 5% mortgage rate look like today?
If you offered someone a 5% mortgage rate today, they would probably say that sounds pretty good.
This is simply because they have seen rates starting at seven or eight recently.
So why doesn’t it look good to see something that starts with the number five? Maybe even six at this point.
This is the exact opposite of what happened when we went from 2% and 3% mortgage interest rates to 6% mortgage interest rates.
That’s the silver lining that’s working in favor of mortgage rates right now.
Human psychology has a way of making things seem not so bad once you’ve been through a much worse experience.
A year ago, the 30-year fixed yield reached a 21st century high of 8%. Then interest rates rose and fell to about 6% in September.
For your information, this increase was 8.64% during the week beginning May 19, 2000, per Freddie Macand we’ve never gotten close (peaking at 7.79% in late October 2023).
It has since rebounded to 7%, likely because Trump won a second term as president and many expected inflation to rise under his watch.
Where they go from here is another question, and I’ve already talked about it.
What I mean when I say that mortgage rates could go down
Now back to the “less” question.
When I talk about mortgage rates now, I frame them using recent levels. While this may seem obvious, it often seems to get lost on people.
So, if you say interest rates can go down again, or go down from here, that doesn’t mean going back to 2% or 3%.
It simply means that they can decline from 6% or to 5% for example.
The point here is that it’s not a crazy return to what now looks like unsustainably low interest rates.
It is simply a return to something in between. And when you think about it, something in between makes a lot of sense.
Kind of like Goldilocks. Not too high, not too low. Maybe just right!
Not so high that housing costs are unaffordable and beyond everyone’s reach.
But not so low that demand rises again and housing prices rise.
There certainly isn’t a strong relationship between home prices and mortgage rates anyway.
But that’s been the narrative lately, given how low interest rates have been. And remember, they could collapse all together if the economy weakens and fewer buyers are willing or able to buy homes.
Of course, it is not up to us to decide the next direction of interest rates, or the Federal Reserve 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 the coming years may also play a role, as increased bond issuance could lead to lower bond prices, which means higher interest rates to compensate.
Let’s just hope prices find a sweet spot that leads to a better balance in the housing market, where buyers and sellers can transact again in a healthy way.
Read on: How to track mortgage rates.
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