Mortgage Rates, The Economy & its Effect on Real Estate Investors

By: Jeff Ball, CEO Visio Financial

Our Federal Reserve has been front and center as investors and policy makers around the globe wait to see when we’ll finally have a “lift-off” in short-term U.S. interest rates. The Federal Reserve’s direction forward is important for real estate investors, but less because of what it means directly for mortgage rates and more because of what it says about the state of the U.S. and broader global economy.

Graphed [above] is the Federal Funds rate, 10-year U.S. Treasury constant maturity rate and 30-year mortgage rates.  [See www.research.stlouisfed.org to take a look at this data and more.]  A few observations:

  1. Holding steady at historical lows.  Mortgages rates are lower today than they were a year ago, approaching the nadir of 2012 and well below the average of approximately 6% over the past 45 years--same for the 10-year U.S. Treasury. This is not what one would usually expect to see in an economy that appears to be steadily improving, with increasing home prices and decreasing unemployment. 
  2. Long-term secular trend.  But as you can see from the graph, all three of these barometers generally have been trending down since peaking in 1981. You’d find similar trends in other developed countries such as Germany, the UK, Canada and Japan. So what gives?
  3. Decoupling.  30-year mortgage rates closely follow 10-year U.S. Treasuries. This largely is because the same investors that buy U.S. Treasuries also buy mortgage-backed securities (that are backed by 30-year mortgages). As you can see from the graph, mortgage rates and U.S. Treasuries also seem to correlate to the Federal Funds rate, but as it turns out the relationship is less direct because the Federal Reserve can only directly influence short-term interest rates. From the graph, it is interesting to note the decoupling that took place as the Fed dropped the Federal Funds rate to near zero in 2009.

So what does this all mean for real estate investors? I think it means mortgage rates and long-term interest rates likely will remain low in the U.S. throughout 2016 and probably well beyond. The Federal Reserve may increase the Federal Funds Rate 25 or even 50 basis points, but that likely won’t move long-term interest rates. For long-term interest rates to increase and thus mortgage rates to increase, we’d need to see a significant improvement in growth prospects at home and abroad. Right now, that simply is not in the cards with slow growth expected for all developed economies (U.S., Japan, U.K., Germany) and key emerging markets (Brazil, Russia, India and China).