How Low Will Mortgage Rates Go?

Mortgage interest rates have hit historic lows over the last few weeks. Will they continue to go lower?

Irvine Home Address … 155 CHURCH Pl Irvine, CA 92602

Resale Home Price …… $649,000

How – low – can you go? How – low, can you go?

How – low – can you go? How – low, can you go?

How – low – can you go? How – low, can you go?

How – low – can you go? How – low, can you go?

Ludacris — How Low

Mortgage interest rates have dropped sharply over the last few weeks, and they show no signs of bottoming. The stock market has been selling off and everyone is bracing themselves for a renewed recession as our economy double dips.

Mortgage rates hit new lows but housing demand lags without tax credits

July 1, 2010

A good news-bad news scenario continues on the housing front, with mortgage interest rates dropping again to record lows, according to the latest survey by home-loan buyer Freddie Mac.

The bad news: With the winding down of government stimulus programs, even fewer people are taking advantage of the eye-popping rates to buy homes.

Mortgage interest rates are determined by supply and demand like prices in any market. Right now, there are few investment opportunities in our moribund economy, so money is seeking the low risk of government-backed mortgages. Since the GSEs now carry the full faith and credit of the US government, GSE mortgage-backed securities are no different than 10-year Treasuries. Since yields on those securities have dropped below 3%, it is not surprising that money would seek a higher yielding alternative.

What is surprising is how weak the economy is. For mortgage interest rates to be this low and falling means that investors see no other viable investment opportunities. Why would you tie your money up in long-term mortgage debt — especially if you thought inflation was coming? The only reason anyone would do this is because no other viable opportunities exist. The double-dip recession is on its way.

The lenders that Freddie surveyed early this week were offering well-qualified borrowers 30-year fixed loans for up to $417,000 at an average rate of 4.58%, the lowest since the survey began in 1971.

For 15-year fixed-rate mortgages the average was 4.04%. Adjustable-rate loans with the first five years at fixed rates were being offered at an initial rate of 3.79%.

The borrowers would have paid an average of 0.7% of the loan balance in upfront lender fees and points, Freddie Mac said in its survey Thursday, and would have had 20% down payments or equity in their homes.

For solid borrowers who shop around and pay 1% of the loan balance in fees, rates were lower yet, mortgage professionals said. The website, which tracks rates being offered through brokers, said 30-year funding was available at 4.25% for such borrowers and 15-year mortgages at 3.75%.

Those rates are incredible. I wish I were in a position to buy rental properties in Las Vegas, Southwest Florida, parts of Arizona or even Riverside County where pricing is at or near the bottom. When inflation does come back, we could easily see inflation rates exceeding current mortgage interest rates. It's a shame prices are still so elevated here.

The bad news, of course, is that the rates are scraping bottom because of fears that the global economy is in terrible shape. And that has continued a pattern that economists are watching with mounting concern — a mini-boom in refinancings coupled with lagging actual home purchases.

A Mortgage Bankers Assn. index released Wednesday showed applications for refinance loans jumped 12.6% last week from the previous week and were at the highest level since the week ending May 22, 2009.

An index of home purchase applications, by contrast, fell 3.3% from one week earlier. That left refis at 76.8% of total applications, the highest share since April 2009.

"The bad news is we're driving rates down and there's still nothing on the housing sales side," said Anthony Sanders, a senior scholar in real estate finance at George Mason University's Mercatus Center. "It's mostly refinancings, and 50% of the sales out there are foreclosures and distress sales."

Sanders noted that spooked investors worldwide are pouring funds into U.S. Treasury securities, still regarded as a bastion of safety. With the increased demand, the yield on Treasuries has dropped, dragging down the yield on Freddie and Fannie Mae mortgage bonds in the process.

The yield on the 10-year Treasury bond, which serves as a benchmark for fixed mortgage rates, dropped below 3% this week for the first time in more than a year.

That ultimately means lenders can offer lower rates on the mortgages backing the bonds.

Loans insured by the Federal Housing Administration remain available with 3% down payments to those who can qualify and pay the premiums for the insurance.

But government-controlled Fannie Mae and Freddie Mac have tightened their lending standards after heavy losses left them wards of the U.S. government. Federal tax credits for home buyers ran out at the end of April, and unemployment remains distressingly high, Sanders said.

"The facts of the matter are that we've exhausted what the government can do for the housing market," Sanders said. "The tax credits were the last hurrah of the stimulus."

Not surprisingly, given his comments, he's expecting another dip in housing prices as "the subsidies go away, the Bush tax cuts wear off and healthcare costs go up."

–E. Scott Reckard

Ultimately, mortgage interest rates have to go up, but as long as the economy remains in the doldrums and there are few competing investment opportunities, mortgage interest rates can still go lower. Far from being a good thing, it is a sign of how bad things really are.

Market clearing rates?

Markets generally seek an equilibrium of supply and demand known as the market clearing price.

For 150 years (from approximately 1785 to 1935), the vast majority of economists — the classical or neoclassical school — took the smooth operation of this market-clearing mechanism as inevitable and inviolate, based largely on faith in Say's law. But the Great Depression of the 1930s caused many economists, including John Maynard Keynes, to doubt their classical faith. If markets were supposed to clear, how could ruinously high rates of unemployment persist for so many painful years? Was the market mechanism not supposed to eliminate such surpluses? In one interpretation, Keynes identified imperfections in the adjustment mechanism that, if present, could introduce rigidities and make prices sticky. In another interpretation, price adjustment could make matters worse, causing what Irving Fisher called "debt deflation". Not all economists accept these theories. They attribute what appears to be imperfect clearing to factors like labor unions or government policy, thereby exonerating the clearing mechanism.

Most economists see the assumption of continuous market clearing as not very realistic. However, many see the assumption of flexible prices as useful in long-run analysis, since prices are not stuck forever: market-clearing models describe the equilibrium towards which the economy gravitates. Therefore, many macroeconomists feel that price flexibility is a good assumption for studying long-run issues, such as growth in real GDP. Other economists argue that price adjustment may take so much time that the process of equilibration may change the underlying conditions that determine long-run equilibrium.

There is no question that the housing market has been manipulated by government intervention and lenders refusal to foreclose on squatters. This has created circumstances were prices are artificially supported at levels where market clearing has been greatly delayed. However, since housing markets are nearly completely dependant upon borrowed money, perhaps the market can be cleared by lowering the cost of financing so much that the inventory of distressed properties can be cleared by low interest rates rather than low home prices. At least, that is what our government and banks hope will happen.

I don't think it works that way. I believe we can find a temporary equilibrium where low mortgage interest rates can support prices, but at some point, competing demands for capital will force interest rates to go higher, probably long before the inventory of distressed properties has cleared the market, particularly in the hardest hit markets. As interest rates go up, the amounts financed will go down and prices will enter a long period of slow decline.

I am very bullish on real estate in beaten down markets because the price-to-rent ratio is so favorable. I am not bullish because I believe resale prices will go up because they probably won't. I am bullish because owning for positive cashflow is a superior method of investment, and opportunities in many markets are the best they have ever been, and if safe-haven investors are willing to put money into mortgage debt at rates likely to be below future inflation rates (something I consider foolish), taking on mortgage debt for investment properties — mortgage debt held to a 15-year maturity — is a great idea.

The old notion of speculating on resale price is dead. The new real estate market is about buying for future cashflow.

100% financing implosion

Those with the least in the transaction are generally the first to give up. We used to see many 100% financing deals gone bad, but this is the first I have seen in a while. I thought we had flushed most of them out of the system, but apparently a few have held on.

Today's featured property was purchased for $710,000 on 4/13/2005. The owner used a $567,920 first mortgage, a $141,980 second mortgage, an a $100 down payment… I guess, technically, it isn't 100% financing, but the amount put down is less than a rental deposit.

These owners gave up earlier this year.

Foreclosure Record

Recording Date: 06/09/2010

Document Type: Notice of Default

Irvine Home Address … 155 CHURCH Pl Irvine, CA 92602

Resale Home Price … $649,000

Home Purchase Price … $710,000

Home Purchase Date …. 4/13/2005

Net Gain (Loss) ………. $(99,940)

Percent Change ………. -14.1%

Annual Appreciation … -1.7%

Cost of Ownership


$649,000 ………. Asking Price

$129,800 ………. 20% Down Conventional

4.80% …………… Mortgage Interest Rate

$519,200 ………. 30-Year Mortgage

$131,339 ………. Income Requirement

$2,724 ………. Monthly Mortgage Payment

$562 ………. Property Tax

$117 ………. Special Taxes and Levies (Mello Roos)

$54 ………. Homeowners Insurance

$0 ………. Homeowners Association Fees


$3,457 ………. Monthly Cash Outlays

-$462 ………. Tax Savings (% of Interest and Property Tax)

-$647 ………. Equity Hidden in Payment

$238 ………. Lost Income to Down Payment (net of taxes)

$81 ………. Maintenance and Replacement Reserves


$2,667 ………. Monthly Cost of Ownership

Cash Acquisition Demands


$6,490 ………. Furnishing and Move In @1%

$6,490 ………. Closing Costs @1%

$5,192 ………… Interest Points @1% of Loan

$129,800 ………. Down Payment


$147,972 ………. Total Cash Costs

$40,800 ………… Emergency Cash Reserves


$188,772 ………. Total Savings Needed

Property Details for 155 CHURCH Pl Irvine, CA 92602


Beds: 4

Baths: 2 full 1 part baths

Home size: 1,750 sq ft

($371 / sq ft)

Lot Size: 3,254 sq ft

Year Built: 1999

Days on Market: 170

Listing Updated: 40308

MLS Number: S10000806

Property Type: Single Family, Residential

Community: West Irvine

Tract: Ol


According to the listing agent, this listing may be a pre-foreclosure or short sale.

Great Irvine location, best city, best neighborhood, great house.

32 thoughts on “How Low Will Mortgage Rates Go?

  1. Planet Reality

    As I’ve stated long before and was laughed at, I expect the low in mortgage rates to be in the 3’s.

    As I sated long before and was laughed at this will be with a more normal 100 BPS spread between the 30 year fixed and the 10 year t-bill.

    Interest rate cycles are very very long, and we are not at the bottom yet. The ten year t-bill will surpass historic lows at this bottom.

    I have been right, and I have benefited considerably. I do have the money to buy property in Las Vegas but I’m not foolish enough to throw it away. That market is in huge trouble with over supply, high unemployment, low education jobs, and the evolution of the consumer.

    1. alan


      I suspect you are as old as me, back when Volker ran the fed in the late 70s and interest rates spiked to nearly 20% levels due to “inflation fears”

      Back then there was a saying.. There are two kinds of people in this world.. Those who think they know were interest rates are going and everyone else. It is still true today.

      Yes, we know you are in the first group so get a life. Long term, interest rates have to go up. That’s a given. Short term, who knows, you probably are right but it really isn’t worth shouting about.

      1. Planet Reality

        As you know interest rate cycles eventually bottom out with huge inflation.

        As you know interest rates never rise fast enough to account for that inflation.

        The longer the fed rate is held to zero the lower mortgage rates will go. I could be wrong and mortgage rates could bottom out in the 2s% if the fed rate is held to zero for the next 10 years.

    2. wheresthebeef

      Planet Reality, I see you couldn’t stay away for very long. It’s just too tempting for you to preach on this blog about low rates and increasing Irvine home prices. Maybe rates will go down to 1 or 2 percent…who knows at this point. One thing is for certain, do not underestimate the shortsighted, suicidal financial decisions that are made by the current “powers that be.” This is not a free market anymore and probably hasn’t been for a very long time. The current financial health of this country is being set up for the final death blow…buy in Irvine now or be priced out forever. Bwhahahaha!

      1. Chris

        Well, he’s been right so far. Irvine home prices aren’t exactly falling like a rock.

        “increasing Irvine home prices”

        I didn’t think he was advocating that but rather a flatline which is currently the condition.

        Unless there’s a double dip (and a huge one), I doubt Irvine home prices will drop dramatically.

    3. FormerIrvinite

      Can’t wait for Thanksgiving.

      CHARLIE ROSE: And what is the story of the turkey?

      NASSIM NICHOLAS TALEB: In the book, I have the story of a turkey that is fed for 1,000 days by a butcher, and every day confirms to the turkey and the turkey’s economics department and the turkey’s risk management department and the turkey’s analytical department that the butcher loves turkeys, and every day brings more confidence to the statement. So it’s fed for 1,000 days…

      CHARLIE ROSE: Gets fatter and fatter and fatter.

      NASSIM NICHOLAS TALEB: Fatter and fatter. On the day when its comfort will be at its maximum, there is going to be a surprise. There will be a surprise for the turkey.

      CHARLIE ROSE: Yes.

      NASSIM NICHOLAS TALEB: There will be a surprise for the turkey’s economics department, all those Ph.D.’s. Will it be — after all, there’s maximum (inaudible)…

      CHARLIE ROSE: But it’s not a surprise for the butcher, is it?

      NASSIM NICHOLAS TALEB: Not a surprise for Charlie Rose as well. Not a surprise for humans. It’s a surprise for the turkey. So the whole idea here is we are not to be a turkey.

      1. Freetrader

        The Black Swan is a great book, I agree. Love the turkey story – the turkey sounds exactly like Planet Reality.

  2. lowrydr310

    The stock market has been selling off and everyone is bracing themselves for a renewed recession as our economy double dips.

    The markets are up this week; the Dow is now back over 10,000 – no reason to worry or panic.

    I’m at a point where I don’t see the stock market, at the moment, as a place to invest. It seems to me like a big gambling game; gambling, not investment. If I’m going to gamble, I’ll at least go to Las Vegas where the house openly admits it has an advantage and I know the odds of the game.

    The market reactions to the most obscure reports are very volatile, at least that’s the way the media spins it. Unemployment claims are higher than expected, market drops. A day later, some other report comes out and the markets go back up. Weird.

    When I do play the market gambling, I try to limit myself to something that looks like a real investment, but even then I can’t help but wonder what behind-the-scenes manipulation is going on.

    1. wheresthebeef

      The stock market has been a casino for the last 15 or so years. NOBODY knows where this thing will end up. With all the manipulation going on, only the people in the know will make money on short term trading trends. The buy and hold strategy certainly doesn’t work anymore. I would rather take my money to Vegas, at least you get free drink, comped rooms and loose women to hook up with. The Wall St casino will take half your money in the blink of an eye and then you will get lectured by the shills that claim the historic 8% return from the past and the famous line “where else are you going to put your money, in a CD or money market account?”

      If you do not know how to trade, there really isn’t any reason to be in this market. Your chances or losing money are probably greater than making any. Caveat Emptor in a big ass way!

    2. darms

      IMHO if I want to gamble I’ll do it at a casino, they are much more tightly regulated than the stock market aka what Atrios @ Eschaton normally refers to as ‘the Dog Track’ usually with a “Whee” somewhere in the post title…

      1. Anonymous

        Nay, if you want to gamble you should OPEN a casino and stack the odds in your favor 🙂

  3. Stock Investor

    Actually, both mortgage interest rates and stock market indexes look higher than they were week ago.

    Dow: 9750 -> 10070
    30-year FRM (broker quotes): 4.1% -> 4.2%

  4. lowrydr310

    One more thing I forgot to mention; look at the purcahse date – five years ago (plus two months). Was this a 5/1 Option ARM? RECAST TIME!

    My guess is that many of the earlier option ARM buyers (purchased in 2002-2005) were or are still able to get out relatively unscathed by selling at what they owe. Sellers list at the 2002-2005 price, and current knifecatchers buyers think they’re getting a great deal since it’s less than 2007 prices.

    We’re now seeing 2005 vintage Option ARMs recast; 2005 was still before the peak. How many more of these loans are going to recast over the next two years, and are there enough of them to affect the local market? As we start to approach the wave of 2006-2007 vintage Option ARMs recasting, those sellers may have a difficult time selling for what they owe.

    Who knows, maybe the theory of Irvine being a safe haven and attracting cash buyers or buyers willing to take a bigger risk will hold true keeping prices elevated. Either way, I’m confident my theory above about ARM recasting will certainly affect the entire region – look out for the IE.

    1. Planet Reality

      When it’s all over, life in Riverside is going to look like the impoverished hardships of a Charles Dickens novel.

      I expect another up year in prices for Irvine. Similar to what I expect for bonds.

  5. jimfromJaxFla

    According to Gerald Celente, Trends Research, The average household income in the US is at 1999 levels..
    of course, expenses are at 2010 levels… therein lies the problem…
    if home prices are still at apprx 2002-2003 levels, unemployment on the rise, Bush tax cuts to expire, “Health” I mean SICK CARE taxes soon to increase, all income taxes rates to increase in Jan 2011, prices still have AT LEAST 4 years further to fall..
    Looks Like it’s time for some AUSTERITY measures..
    HEY, how about those “GREEN SHOOTS”???

    1. newbie

      Them green shoots mature into weeds.

      I didn’t think interest would go this low. Is the US entering into Japan II ? Low interest and high unemployment (no employment for the lost generation).

      Japan when from riches into their recession when the US got them to change their conversion rate (make the Yen more expensive). Same trick is being tried today, except the PRC don’t want a Japanese recession in China–too much chance for a revolt. The US needs to find some cash rich and non essestial comsummer goods exporting nation to suck dry. This can only be done by making that country’s masses into spendthrift consumers. The US still has a chance with PRC.

      Most people don’t under stand which is better situation for the same house:
      1. $1,000,000 price at 5% interest.
      2. $300,000 price at 20%

      1. Laura Louzader

        20% interest would be fun- for a brief time.

        My mother could get a decent rate on her CDs and maybe scarf up some non-callable 20 year munis paying 17%. Can you believe that during the last period of high interest rates, the early 80s, that cities actually issued NON-CALLABLE 30-YEAR BONDS PAYING 13%. And they were REAL AAA PAPER, PRE-SUNK.

        And I could get an incredible deal on a condo, if I paid cash.

        That’s how stupid municipal governments are. Unfortunately, our state and local governments are so badly run and mired in debt, they soon won’t be able to pay anybody anything.

        So it would probably do much more harm than good to raise the rates THAT high. That’s done only when inflation is run amok, to get things back in hand.

        We just need normal interest rates, of about 7%. There would be rewards for saving, and the housing market would eventually find stability and function normally.

  6. Soylent Green Is People

    These reports do not accurately reflect the true rate picture and are often quite stale dated. For example, BankRate is pushing all sorts of PR clips today about how the average rate has fallen to 4.51%. Yes, if your loan was in the pipeline two weeks ago… Yes also if you were paying .39 in points and all lender plus third party fees. Like the 6.0% commission dinosaur, the 1.0 point loan origination fee is evaporating. This means a 4.51% rate with costs is likely a 4.75% rate with no cost. That’s the true market today, but sadly unreported.

    You could have a -0- percent rate, but that might not boost sales given where prices are. Many agents have been lowering their sellers prices in a sub 5.0% rate market. Why is that? Because although the horse is at the trough, it still refuses to drink the kool-aid being offered.

    As for a sub 4.0% 30 fixed rate, I’m sure all things are possible, but how likely is it to happen? With an approximate 1.0% rate cost to originate a loan, 1.0% to service the sucker, and 1.0% in rate cost to sell to FNMA, the buyer of this Mortgage Backed Security (MBS) would have to accept an uninsured return on investment at about 1 to 1.5%. That’s without counting for inflation. Because the cost is near bottom, and investor return is nearly zero relative to a standard US-T, sub 4.0% rates are not likely.

    I’ve been wrong once before – when I thought I was wrong but really wasn’t. If we see sub 4.0% 30 fixed rates then it will be my second time to misguess the future. 🙂 It happens to the best of us!

    My .02c

    Soylent Green Is People.

  7. irvine_home_owner

    And yet Irvine keeps on selling those homes:

    O.C.’s hottest-selling new homes in Irvine

    Where were those bear-llies who thought The Irvine Company couldn’t sell through half of those homes they announced in January 2010? Not only did they sell them, they sold out and TIC is putting more homes on the block.

    Good for me because that means Laguna Crossings may actually build before 2020… bad for me because current ridiculous pricing isn’t getting any lower.

    1. Soylent Green Is People

      Curious what the draw is to Laguna Crossing. There are zero trees out there unlike established areas of Irvine. Yes, they’ll plant them, but it will take years to green up. It’s often quite hot relative to other areas of the county even though the property is a bit closer to the ocean. To me it’s Quail Hill part deux IMHO so why not buy in QH? Just askin.

      1. irvine_home_owner


        Yo <3 QH too... I'm just not too happy with the floorplans there and the ones I do like are up in the $1.5m range (which is probably where LC will end up anyways). I'll take a Chantilly model... or even a Tapestry but at $1m+ when they originally sold for $700ks... that's crazy.

        I'm not sure where you get the temperature thing, QH has always seemed cooler than the more inland areas of Irvine... even the elevated Portola Springs.

        It's all about the NHS (New Home Smell) and maybe The Irvine Company will throw me a bone and build a 3CWG home there. I'm hoping the sequel is better.

    2. Planet Reality

      How are new home sales doing in Riverside and Las Vegas for 30-50% the price of an Irvine home????


      1. IrvineRenter

        New home sales in Riverside County are more than double the sales figures in Orange County. There will be nearly 5,000 new homes sold there this year. That is still more than 80% less than the peak of 35,000 sold in 2005.

        Even Las Vegas is selling new homes which is quite surprising considering how many empty homes are just sitting there.

        If you are trying to imply that new home sales are a sign of market vigor and that Orange County is superior in that regard, you are barking up the wrong tree.

        1. irvine_home_owner


          What was new home sales pace for Irvine in 2005?

          I don’t recall new homes moving as fast as WB/WBE and there wasn’t a waiting list or instant sell out of phases back then… but I could be wrong.

        2. Planet Reality

          LOL, you thought I was taking about volume? It’s well known that there were far too many homes built in both economically depressed areas. I’m talking about sales pace and sales price relative to peak.

          This home profiled isn’t even new and it’s selling for 8% off peak in Irvine.

          1. nefron

            The Irvine houses I’m watching have been sitting on the market for about six weeks, longer than they would have sat last year at this time. Looks to me like sellers and their agents pushed prices up too high this spring and buyers are balking, despite lower rates. I don’t watch or care about new home sales, only resale.

  8. Mark

    I can imagine rates hitting the three’s and with it more upward pressure on SFH sale prices! Awesome! Exactly what the doctor ordered for Orange County California! Higher home prices!

    1. wheresthebeef

      The day of reckoning will just be postponed with all the BS smoke and mirror tricks. And the reckoning will come down like a 12 lb sledge hammer on those that get caught up in this latest frenzy. We have seen this before and IT WILL NOT END WELL!

Comments are closed.