You will not see 4% mortgage interest rates again in your lifetime

Mortgage interest rates have broken above 5% for the first time since early 2010. Will be see 4% interest rates again?

Irvine Home Address … 27 FIRWOOD 27 Irvine, CA 92604

Resale Home Price …… $304,900

Goodbye doesn't mean forever

Let me tell you goodbye doesn't mean

we'll never be together again

Though we may be so far apart you still will have my heart

So forget your past my Goodbye Girl

'Cause now you're home at last.

Bread — Goodbye Girl

The interest rate cycle is very long, and we are bouncing off historic lows. It is reasonable to think interest rates may go up based on reversion to the mean. The average over the full cycle (down, up, down) is 9%, and interest rates generally hover between 7% and 11%.

Back in early December, I noted Mortgage interest rates hit five-month high. Since then, other pundits are starting to proclaim the end of the era of mortgage interest rates below 5%.

Kiss 4% mortgage rates goodbye

By Les Christie, staff writer —

NEW YORK ( — The era of near 4% mortgage rates has ended after a quick rate rise since early November. But some industry experts think that may be a good thing for the flagging housing market.

The average 30-year fixed mortgage rate has risen to 4.86% from 4.17%, according to Freddie Mac's weekly mortgage market survey. In the weekly survey, the rate has risen to 5.02% — crossing the 5% mark for the second time in three weeks — after being as low as 4.42% as recently as early November.

Rates haven't been this high since May and forecasters now predict them to remain between 5% and 6% for all of 2011.

“You can kiss those record lows goodbye,” said Greg McBride, chief economist for

Is this a good contrarian indicator? Since everyone is starting to say interest rates are going much higher, will the market reverse and send interest rates back down?

Keith Gumbinger of HSH Associates, a provider of mortgage information said that the market reached a new plateau.

“I don't think we're going back to a 50-year low anytime soon without an economic collapse,” he said. “Rates will probably never revisit those levels.”

That is the essence of the argument: rates will not go back to ultra-low levels as long as their are competing investments where returns are attractive, something which requires an expanding economy.

The increase will push mortgage payments higher for homebuyers. When rates rise from 4.25% to 5% it takes away about 9% of buying power, according to McBride.

“That's nothing to sneeze at,” he said. “But it's still small relative to the steep drop in home prices over the past few years.”

He is right. In Las Vegas where prices are very affordable, a small decrease in affordability will not make much difference; however, in inflated California markets where every penny of affordability is needed to support pricing, rising interest rates will be a serious problem.

Good for the market?

Higher interest rates may even prove stimulating to the still quiet housing market in which sales volume and prices are scraping near their bottoms.

“The initial phase of an interest rate increase generally does not hurt markets,” said Lawrence Yun, chief economist for the National Association of Realtors. “In fact, it can help.”

The rapid rise introduces an element of urgency for potential homebuyers. They may now rush to buy before rates spurt even more.

OMG! It's been a year, but it is worth revisiting: Urgency Versus Reality: realtors Win, Buyers Lose.

The strength of the economic recovery will have far more impact on the housing market that this relatively modest increase in mortgage rates, according to Yun. If hiring gains momentum, housing markets should revive.

“If we add 2 million jobs as expected in 2011, and mortgage rates rise only moderately, we should see existing-home sales rise to a higher, sustainable volume,” said Yun.

Gumbinger said that demand for homes may be tempered somewhat by the increased mortgage costs and so affect home prices a bit but the improving job picture and better consumer confidence matter much more.

“If the other factors are aligned,” he said, “interest rates are not a big thing.”

Economists are correct to point out that jobs are the creator of all real estate demand. The unemployed may desire houses, but they don't effectively add to demand.

What follows will be repeated by the NAR often over the next several years. They will complain that “stringent” lending standards are hindering the market and squelching demand. Of course, realtors embraced the Option ARM because it stimulated demand, so we can't count on the NAR to be objective about what lending standards should be.

The real mortgage challenge, according to Yun, is to increase the number of loan applicants winning approvals. Too many potential homebuyers are still finding it difficult to qualify for loans.

“The current mortgage market is a unique situation” he said. “It's less about rates than it is about underwriting standards, which are, in my opinion, still too stringent.”

“If lenders return to more normal, safe underwriting standards for creditworthy buyers, there would be a bigger boost to the housing market and spillover benefits for the broader economy.”

So do you think the era of sub-5% mortgage interest rates is gone for good?

Fannie Mae shadow inventory

In 2011 we will see many properties emerge from shadow inventory. Lenders are not going to let these sit vacant and rot on their books forever. Fannie Mae is moving to liquidate the one that started as a default in mid 2009.

Foreclosure Record

Recording Date: 12/31/2009

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 09/17/2009

Document Type: Notice of Default

Fannie Mae bought the property in May of 2010, and it took them 6 months to get it to market. It must be interesting to be a project manager for the banks. Usually a slow and inefficient project manager wouldn't last long, but they probably rise to the top in the bank's property management department.

  • The property was originally purchased on 11/2/2000 for $170,000. The owner used a $165,150 first mortgage and a $4,850 down payment.
  • On 12/31/2001 they refinanced with a $166,500 first mortgage.
  • On 12/13/2002 they refinanced with a $193,000 first mortgage.
  • On 8/3/2005 they refinanced with a $233,558 first mortgage.
  • On 1/4/2006 they refinanced with a $258,748 Fannie Mae first mortgage. The GSEs entered the bubble late as a response to losing market share. This was one of the stupid loans they made that we are now paying for in the GSE bailout.
  • On 1/12/2007 they obtained a $15,778 HELOC.
  • On 5/25/2007 they got a $42,663 HELOC.
  • Total property debt is $301,411.
  • Total mortgage equity withdrawal is $136,261. Not a lot, but enough to cost them their home.

Irvine Home Address … 27 FIRWOOD 27 Irvine, CA 92604

Resale Home Price … $304,900

Home Purchase Price … $170,000

Home Purchase Date …. 11/2/2000

Net Gain (Loss) ………. $116,606

Percent Change ………. 68.6%

Annual Appreciation … 5.7%

Cost of Ownership


$304,900 ………. Asking Price

$10,672 ………. 3.5% Down FHA Financing

5.02% …………… Mortgage Interest Rate

$294,229 ………. 30-Year Mortgage

$63,276 ………. Income Requirement

$1,583 ………. Monthly Mortgage Payment

$264 ………. Property Tax

$0 ………. Special Taxes and Levies (Mello Roos)

$51 ………. Homeowners Insurance

$299 ………. Homeowners Association Fees


$2,197 ………. Monthly Cash Outlays

-$150 ………. Tax Savings (% of Interest and Property Tax)

-$352 ………. Equity Hidden in Payment

$21 ………. Lost Income to Down Payment (net of taxes)

$38 ………. Maintenance and Replacement Reserves


$1,754 ………. Monthly Cost of Ownership

Cash Acquisition Demands


$3,049 ………. Furnishing and Move In @1%

$3,049 ………. Closing Costs @1%

$2,942 ………… Interest Points @1% of Loan

$10,672 ………. Down Payment


$19,712 ………. Total Cash Costs

$26,800 ………… Emergency Cash Reserves


$46,512 ………. Total Savings Needed

Property Details for 27 FIRWOOD 27 Irvine, CA 92604


Beds: 2

Baths: 1 bath

Home size: 1,000 sq ft

($305 / sq ft)

Lot Size: n/a

Year Built: 1978

Days on Market: 31

Listing Updated: 40545

MLS Number: I11000086

Property Type: Townhouse, Residential

Community: Woodbridge

Tract: 0


According to the listing agent, this listing is a bank owned (foreclosed) property.

Great opportunity at a great price! Come see this beautiful condo located in wonderful community! Rich dark wood cabinets bring the kitchen to life! New paint and carpet installed throughout makes the property feel like new! Beautiful views of the bay are within walking distance! Don't pass up on this great opportunity!

48 thoughts on “You will not see 4% mortgage interest rates again in your lifetime

  1. Barron Rothschild

    The world economy is doomed to spiral downwards until we do 2 things:

    1) outlaw government borrowing

    2) outlaw fractional reserve lending.

    Banks should only be allowed to lend out money they actually have and nations do not have to run up a “National Debt”. Remember: It’s not what backs the money, it’s who controls its quantity.

    Very good movie about this on youtube ‘The Secret of Oz’.

  2. F*** Homeownership

    Rent nice places and pack light!

    Maintenance costs more than you think.

    When the LL tells you he’s gonna raise the rent, smile, nod, find another suitable place, and then 30 days before the lease is up drive a written notice over, call him when you’re there and rest assured that you’ll sleep better that night than he will.

    Do it for the children. Save your money for their education.

    1. Pilgrim

      F***Homeownership, we did exactly what you just stated. Our LL changed their tune REAL fast after they received our written notice. All of a sudden they wanted to give us the world. Well, too late. And we did sleep well that night, and we managed to rent a nicer, less expensive house. It all worked out in the end (well, except for our LL).

      1. Geotpf

        Home ownership really only makes sense fior a few people:

        1. An area where monthly housing payments (and other costs of ownership, like taxes, insurance, HOA fees, and repairs) are significantly less than rents. The Inland Empire qualifies; Irvine most certainly does not.
        2. If you have an uber steady job (like with the government) where you are sure you aren’t going to have to move for at least a decade and perferably for the lifetime of the mortgage.

        The best financial decision for pretty much everybody else is to rent.

        1. Joseph

          You’re a bit California-centric in your thinking. Buying is significantly more affordable in much of the rest of the U.S., including the Midwest and the South. There is such a thing as equity, personal savings, and living within one’s means–we are not all Irvinites, you know.

          1. gepetoh

            I think what Geotpf meant but didn’t say was that rent makes sense for most in the CURRENT environment. Market is too unstable right now to jump into homeownership, unless conditions are ideal. I live in the South (Atlanta) and even here, I wouldn’t buy unless I was reasonably sure it is a can’t-miss deal.

  3. wheresthebeef

    IrvineRenter, did you get buy in from Planet Reality before making today’s post? He assured us that interest rates would go lower and stay there as long as the Fed saw fit.

    I’m waiting for his input…

    1. AZDavidPhx

      I thought for sure PR and his fanboys would show up today with their “contrarian” 2% interest rates predictions with the usual side of premium-areas-masterbation. Maybe PR just slept in today.

      1. HydroCabron

        It is the serene sleep of the enlightened. Possessed of the high test scores of the Irvine resident – and of the that rare discernment distinguishing those who comprehend the many tangible, intangible, material, and spiritual glories of that city which can never depreciate – he enjoys the sort of moral and intellectual clarity unheard of among those intellectually and economically inferior to him.

    2. Walter

      Did PR ever specify which plant he was from?
      Maybe he is visiting his real home and we need to await his return?

  4. winstongator

    This is an interesting case because the GSE’s may not do so poorly. Their loan is ~$250k and if it sells for ~$300k-5% = $285k. 2 yrs of missed interest and other fees will probably leave nothing leftover.

    Say you have $500k of property debt, $300k first, $200k second. The first forecloses. I’m thinking, if the holder of the first eventually sells for $400k, they may make a profit, some of which could reasonably be due to the holder of the second. However, from what I know, it is only the proceeds of the auction sale that might be divied up like that. The holder of the second would have to try to get their $ back from the original borrower, not the holder of the first mortgage??

    1. IrvineRenter

      “The holder of the second would have to try to get their $ back from the original borrower, not the holder of the first mortgage??”

      The holder of a second mortgage has no recourse against the first mortgage holder. The second mortgage holder can go after the borrower if the borrower has any assets to take.

      1. winstongator

        Say you have two equal mortgages, $500k each. Default & foreclosure. Estimated sale price is $750k. This leads me to the idea that the larger the 2nd is relative to the 1st, and if the lenders are different, the more relative risk the 2nd is taking, and the less relative risk the 1st is taking. It also lends weight to the idea that after purchase heloc’s should be treated differently than purchase money – the lender on the 1st can’t stop you getting a heloc after the sale, but before they can.

      2. flyovercountry

        So what is the order of claims on the proceeds of the foreclosure sale? Do missed interest payments on a mortgage get the same priority in claim order as the mortgage itself or does principal on the 2nd mortgage get higher priority over missed payments on the first?

        I think the order is this:
        1 – back taxes
        2 – first morgage principal and interest, what about late fees?
        3 – 2nd mortgage principal and interest, fees?
        4 – HOA dues
        5 – mechanics / contractor liens
        6 – and if anything is left, “home owner”

        1. IrvineRenter

          The first mortgage holder will get paid in full, including all the junk fees they can think of, before the second mortgage holder gets a penny. Taking on a second mortgage position is tenuous, particularly if the first mortgage isn’t amortizing.

    2. Honcho

      The Trustee is obligated to distribute proceeds in order of priority.

      At the outset of the non-judicial foreclosure process, the Trustee must send notice of the foreclosure to anyone that has a security interest in the property (there is a list in the non-judicial foreclosure statute of who exactly is entitled to receive notice). Anyone who receives notice from the Trustee, must submit a written claim to the Trustee and the Trustee must distribute excess proceeds in the order of the priority of claims.

      So, assuming there are excess proceeds after the 1st has been satisfied, the surpuls would be distributed to the 2nd by the Trustee, rather than back to the original borrower (if a proper claim was filed by the 2nd). If there is surplus proceeds after all claims have been satisfied, the remainder would go to the borrower.

      1. Honcho

        I think I may have misunderstood your original question…

        Are you asking what happens if the first forecloses and takes the property back because no one bids on the property and then later resells at a profit?

        If that is the question, I am not aware of what recourse the 2nd would have against the 1st, unless there was some irregularity in the bidding process. The 2nd would only have recourse against the original borrower

        1. winstongator

          That was my question. I knew about the proceeds at auction, but usually the 3rd party financed sale is at a higher price than the cash auction.

          Incentives are different if the holder of the 1st can foreclose and make a profit vs. when they are in an extreme loss position.

          It also makes me wonder wtf people are thinking when they pay their 2nds but not their 1st. Realistically, the holder of a 2nd, smaller than the 1st will never foreclose – the 1st would take priority and the lion’s share of the proceeds, with the 2nd holder maybe not getting anything. In that case, someone could go a very long time w/o paying on the 2nd, as long as the 2nd and the 1st are held by different parties.

  5. flyovercountry

    So in Winstongator’s example, if the buyer at forclosure paid more than 300k, the proceeds in excess of that would go to the owner of the 2nd.

    But if the owner of the first (or anyone) only bid $300k, and the 2nd didn’t initiate the foreclosure, then they still have their one action left to use against the loanowner.

    And in the example, the house is really worth $400k in a conventionally marketed sale with some basic cleanup and prep. If the 2nd wants to get any proceeds of that, then they would have to try and bid up the property at time of the foreclosure auction, to either drive the price higher, or buy it themselves and take the market risk of selling it for a profit.

    Is that correct?

    What has a higher claim on the proceeds of the house at auction, unpaid interest and fees on the first mortgage, or principle on the 2nd mortgage?

    What is the full order of claims against a property?

    1 – back taxes
    2 – first mortgage principle
    ? – unpaid interest on first
    ? – unpaid fees on first
    ? – 2nd mortgage / heloc principle
    ? – unpaid interest on 2nd
    ? – unpaid fees on 2nd
    ? – HOA dues

    1. Scott

      The answer to your first question is Yes. The 2nd only gets excess sale proceeds from the initial foreclosure sale, not a subsequent resale. And as IR mentioned above, the 1st will add unpaid interest, penalty interest and fees, attorneys fees, etc, (to the extent provided for in the first trust deed, these are not made up after the fact and probably have some reasonableness requirement) to the mortgage balance before having to pay anything to the 2nd.

      Property taxes have a higher priority than any mortgage, so the first would still have to pay those off before reselling (or resell subject to the unpaid taxes, which would be unusual).

      As for HOA liens, it may vary by state, but I believe in CA they are junior to any mortgage existing on the property at the time the HOA lien is established and so are wiped out when the 1st forecloses. This lost income is causing problems for some HOAs.

    1. AZDavidPhx

      Beautiful views of “the bay” within walking distance

      The ocean view is within driving distance.

      I love it. Why doesn’t the “r”ealtor be honest and say that the view from the Apartment I mean “Condo” is nothing special.

  6. Soylent Green Is People

    “Never” is a pretty long time.

    The 2003-2004 refinance boom saw rates in the 4.0% range, with ads saying “rates will never be this low again”.

    The 2008-2010 refinance boom saw rates in the 4’s – 3’s if you wanted to pay for them, and ads saying “rates will never be this low again”.

    Ask the Japanese where rates are going, considering that their debt is 200+% of GDP. I don’t buy the hoo-ha that Japan is different – perhaps just like Orange County is different – another canard.

    When the double dip becomes the full throttle, pedal to the metal, race to 2001 era price levels, we’ll likely see the Fed begin to reignite the mortgage rate rally solidly back into the 4’s. This Fed is hell bent for leather to re-inflate home prices. Nothing then would surprise me to the downside in rates.

    When they wake the soul of Paul Volker and get serious about systemic problems, you can wake me then.

    My .02c

    Soylent Green Is People.

    1. matt138

      the more debt the fed buys, other investors will demand higher returns.

      QE7 could prove unable to push rates lower.

  7. Paul

    The FHA mortgage rate is only up maybe 0.25% from the low. I think the lowest it went was 4.125% or thereabouts, and it’s up to 4.375%, so not much of an increase. Of course, the APR is more like 5%, but that’s still historically a phenomenal rate.

    Home prices are still high though, and any upward movement in mortgage rates will weaken purchasing power and home prices.

    I do recommend First IB. Their service is just OK, but the rates are really great.

  8. irvine_home_owner

    5% (even 6%) is still a lot lower than 9%.

    So are you guys saying interest rates will rise to 9%?

    1. flyovercountry

      I don’t see 9% happening in the near term… but 9% is definitely realistic if we have higher inflation.

      I paid over 8% in 1991, and inflation wasn’t that bad… roughly 5%.

      We were at over 8.5% as recently as 2000.

    2. IrvineRenter

      “So are you guys saying interest rates will rise to 9%?”

      I don’t think anyone will take on that straw man. We will not see 9% rates in the near future, but 9% is not a high interest rate by historical standards. People talk about 7% rates as if those are high when in fact, 7% is the bottom of the stable range for mortgage rates.

      1. irvine_home_owner

        I think you are proving my point.

        Back in the glory days, the big boogeyman was Freddy HighInterestRates, he was going to demolish home prices by forcing owners to lower their ask to accommodate buyer budgets.

        So if 9% isn’t high, and 7% is the bottom then what are we scared of? Especially if it seems like 5-6% is going to prevail for a while? Not to mention you can always ARM into lower rates (ooo… I said ARM).

      2. wheresthebeef

        Rates of 7% would absolutely crush this market, that is how out of whack things have gotten. Even the housing permabulls would hopefully agree on that.

        1. irvine_home_owner

          It depends which market you are referring to.

          Many people who bought in Irvine 2003-2006 carried 7% loans when prices were sky high.

          1. wheresthebeef

            I’ll use a broad stroke here, 7% rates would kill all markets. Going for 5 to 7% rates effectively gives you 20% less buying power. Either prices go down 20% or borrowers somehow magically come up with “another” 20%…I’ll go with the former.

            Many of those people you are referring to who bought between 2003-2006 are upsidedown now. Luckily that had low rates to refi to; however, if the low rates are in the rearview mirror it’s game over.

          2. irvine_home_owner

            I’ll use a broad stroke here, 7% rates would kill all markets.
            I’m not too sure about that.

            Prices in other markets have retreated to 1999/2000 levels (or so I’ve been told) and people bought back then at 7%-8% too.

            And if IR is contending that 7% is actually lower than average… then housing should survive if prices are truly at that level.

            Some areas of Irvine are probably around the 2006-07 levels and rates were high 6% close to 7% during that time.

            What I’m getting at, and IR probably unwillingly revealed, is that 7% isn’t the monster that will eat all housing because it was actually the “low” at various times in the last few decades. Mr. 11% is who we should be hiding our children from, and if people can’t envision 9% in the near (or even distant) future… then he’s just a story made up by our grandparents.

          3. matt138

            Rates will go double digit. My guess is high teens and possibly low 20s.

            Rates have been too low for too long and we’ve borrowed with wreckless abandon.

            would 18% interest rates put any downward pressure on home prices Mr. Yun?

  9. Anonymous

    OC is such a strange place.

    Went out today, saw a car advertising home cooked all vegetarian doggie meals delivered. Then took my recycling to the store and saw an older man riding a bike with a huge bag full of recycling on the front – looked right out of a third world country.

    So weird – the income contrast here.

    1. Swiller

      This is not weird, this is the new Amerika. The top 10% get taken care of…literally. The bottom 90%, we pay for eveything and STILL the corporations and fat cats whine, bitch, and cajole about how they are losing money.

      As the middle class disappears, more and more people will want to “drop-out” just the same as paying a underwater mortgage. When I see my neighbors on government welfare eating, drinking, paying rent, in the same area as I do, for a prolonged period, it makes me want to quit working. WTF is the point?

      As the cost of living rises, and welfare rises with it, the wages remain stagnant or are lowered. As time goes on, those on welfare, and the ones working for those on welfare (me), the standard of living is getting real close.

      As houses go, so I see employment. Why work when you cannot get ahead? Sad times I see ahead for all because people get rewarded for failure….on business, on housing, and on labor.

      Tired of the f’ing hamster wheel.

      1. just bought in irvine

        This is even more true in California. Living on welfare has become a generational lifestyle for many.

        People are rewarded for being Lazy. In fact if you make anything close to the mean income , you might come out ahead if you make much less and qualify for all the welfare programs.

        I hope the financial realities force Gov. Brown to cut a lot of these welfare crap.

  10. ochomehunter

    Interest Rate game is rigged by FED. I am betting on lower interest rates and even lower prices and all in 2011 itself. My reasons are:
    1. Global stock markets are at the tip of round 2 collapse. When that happens, watch joe bloes buying treassurues besides FED.
    2. Europe is about to implode, Spain is in deep trouble and so is Italy. Its just a matter of time when panic hits markets.
    3. When equity markets selloff hard, your returns are at major risk, even precious metals selloff due to margin calls. Only thing that will rally is Dollar and Treassury.
    4. Call it FED manipulation, but the only way FED/US Govt. can force everyone to buy Treassuries is by creating panic. So far FED has pumped trillions into global markets! Even so the interest rates have not risen in US but are near historically lows. What will happen when we get round 2 of major selloff? It will happen.

    I am one of those who is looking to buy in Corona and am giving up on idea of owning home in OC, reason being that Debt to income ratios here with current prices are too high and I dont know where my construction industry is headed! I can afford in Corona and have decent savings as well.

    Even after earning over $130K/yr, its a shame that its hard to find a good affordable home in OC while suckers are squatting in homes without earning much if any!

  11. tenmagnet

    It seems like the premium areas are alive and holding up well thru the downturn.
    63 New Dawn closed yesterday for $1.847M

    1. Scott

      I disagree to a point. Right now the high end here is somewhat like the lottery – there are a small number of lucky sellers that find buyers and still get premium pricing, but most of the high end inventory is sitting or being removed from the market unsold.

      In the high end OC areas I am watching the inventory and distressed inventory is on the increase and there are clear signs that pressures are building. That said, if the price drops do not materialize in the next six months or so, then I will accept that I am wrong.

  12. Ron

    The HOA dues for this property are incorrect, I believe. There are two HOA’s: one is $300, the other (Woodbridge Village Assoc) is $82/mo.

  13. homeo owner

    Owning a home suks… Orange County Suks…

    92692 SUCKS chit.

    ChityMortgage Suks…

    Who wants to live here now?
    USA is starting to just suk.

    Mexico looks better and better ever minute.

    you tube ‘End Game’…. you will never be the same.

  14. newbie2008

    To prevent losing a home, one must have a positive mental attitude that one is getting free rent, free property taxes, free HOA, cashing out on the equity withdrawal if you got the equity withdraw money. If you bought at the high at low to no down, you’re only get free rent, free property taxes, and free HOA. If you bought with a large down, you’re out of luck. Remember, it’s a FC on a house and not your home. Keep you family intact.

    The US has low interest during the great depression and high govt spending. Took WWII to get the US out of the depression. I don’t think the hacks are smart enough to keep out of someone else war today. The US is too much of a busybody not to get in a shooting match. FDR sold weapons, food, steel, trucks to both sides before entering WWII and gave some weapons to friend who sold them to England.

    IR, When will you write a series on housing during the great depression?

    MSNBC, CNN and the other finanical news are saying the stocks have been doing extremely well for 2 years and the economy is a strong rebound.

    1. Paul

      The media always confuses the stock market with the economy. My personal forecast is – stocks will do great; job market not so much.

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