Tuesday, November 20, 2012

How Low Could Mortgage Rates Go?

Click to enlarge.

Should the economy continue to struggle and short-term CD rates therefore stay near 0% for longer than most assume possible (think Japan after their housing bubble popped), then this chart would suggest mortgage rates could fall below 2% (at least temporarily).

In any event, those thinking that today's mortgage rates are currently at extreme bargain levels may wish to reconsider. Compared to 3-month certificates of deposit, they are pretty much what we would expect to see.

This is not a prediction nor is it investment advice. It is simply something to think about.

Source Data:
St. Louis Fed: Custom Chart


Stagflationary Mark said...

As a side note, banks are @#$%ed if mortgage rates fall to 1%.

How much money can they possibly make borrowing at 0% and lending at 1%?

Enough to keep the lights on?

Jazzbumpa said...

They make it up in volume.


dd said...

You are missing the theoretical money banks are making on IRS and CDS. Went to a banking lecture on this very subject. The amounts to be made are apparently infinite and the loan is simply a loss leader.

Stagflationary Mark said...



Saturday Night Live: First CityWide Change Bank 2

All the time our customers ask us. How do you make money doing this? The answer is simple. Volume.

Stagflationary Mark said...


Theoretical money?
Apparently infinite?

That does indeed sound like a banking lecture. I don't know whether to laugh or cry. ;)

Troy said...


is a screenshot of some of Mizuho's fixed-rate offerings. The bottom one is 35 year.

Mizuho was the result of the merger of Dai-ichi Kangyo and Fuji, plus some other bank in 2000.

Living in Japan 1992-2000 really prepared me for what is happening now, alas.

Not that I think our road over the next 20 years is going to look anything like theirs.

Technically, I think I'd rather have our problems than theirs to solve. But politically I think their problems are more tractable.

Both countries basically need to double the tax level, though for different reasons. We need to double the tax level because we can't run a $6T outgo on a $3T

The Japanese have actually been rather austerity-driven compared to us. Their spending has not really grown much since the 1990, it's just that the shifting demographics (shrinking youth) makes everything suck for too many economies, and of course the Japanese hourly wage is China's daily wage. That's never good!

TJandTheBear said...

Nah, like any normal household you simply need to cut the "outgo" in half to match your income.

p.s.: I'm buying a home when rates go to zero percent or 20 percent, whichever comes first. ;-)

Luke Smith said...

Rates are a bargain, but is what I am buying a bargain?

TJandTheBear said...


If you never need to sell then you may be okay; otherwise, no.

Rob Dawg said...

Entering into a 30 year 3% mortgage can be the cheapest inflation hedge ever invented. If we see a free rise to 10-12% the NPV can probably be covered with what will then be a car payment.

Scott said...

Rob, I agree with you regarding a mortgage as an inflation hedge. That's finding the bright side to the story.

Theme song:

Mr. Brightside

TJandTheBear said...

The mortgage will be cheap, but the property will be even cheaper.

Stagflationary Mark said...

I'm with TJandTheBear on this.

There are two ways real estate could be a poor inflation hedge.

1. Hyperinflation! I know it sounds counter-intuitive, but history shows that real estate (in real inflation adjusted terms) often does extremely poorly during hyperinflation. Too much money is diverted to food and other even more basic necessities. In times of severe economic trouble, people can share housing. For example, my "McMansion" could easily house a few extra friends or relatives.

2. Lack of inflation. Interest rates of 3% are no bargain if we slide into Japan's deflationary mess. (Japan's CPI was actually flat over the past few decades.)

Stagflationary Mark said...

Once again, I'm not predicting those things. I'm just pointing out what could eventually happen.