How Long Can Mortgage Rates Remain So Low?

Mortgage rates have been far lower than expected in 2014, rates which should have resulted in booming home sales and rising real estate values. However that has not been the case. Instead what we have is a weird situation where mortgage rates remain in a trough and potentially might even go lower.

It was originally thought that mortgage rates would be around 5 percent according to estimates by the National Association of Realtors and the Mortgage Bankers Association. NAR predicted that loan rates would reach 5.4 percent this year while the MBA said 2014 rates would “increase above 5 percent in 2014 and then increase further to 5.5 percent by the end of 2015.”

Both guesses were wrong, a common problem with economic models. But the big question is why. Here’s what’s really happening:

Mortgage Rates and Fewer Foreclosures

The effect and importance of Dodd-Frank and Wall Street Reform has had a real and impressive impact on the national economy. Speaking before the House Committee on Financial Services, the legislation’s co-author and former committee chairman, Barney Frank (D-MA) said “the very purpose of the statute was in fact to bring about changes in a number of areas in our financial life, residential mortgages foremost among them.”

While the financial industry, at least in part, yelled and screamed about the new rules the fact is that the Dodd Frank legislation has had a very important impact on the marketplace. Data produced by RealtyTrac and published originally at Forbes.com shows that foreclosure rates are now BELOW pre-meltdown levels. In other words, mortgage investors can safely bring their dollars to the United States with the certainty of little risk.

Why is this important? Look around the world. If you had money where would you want to put your wealth? How about a nice, safe real estate investment in China, Ukraine, Iraq or Russia? What about Europe with its slowing economy? Or would you rather move your wealth to a place where at least your money — and your family — have some possibility of preservation?

It’s impossible not to notice the huge bulge in the US financial system, by one estimate some $2 trillion in excess cash is held by American institutions. Why is this money here?

Mortgage Foreclosure Rates By Vintage
First, the Dodd Frank rules have succeeded in reducing marketplace risk for mortgage investors. Therefore, they want to bring their dollars here from all over the world.

Second, with so many dollars and so little risk in the system it naturally follows that interest rates remain near the historic lows seen in 2012.

Third, it’s actually possible that rates could continue their decline and once again dip below 4 percent. As of mid-August we were not that far off and with real estate sales trailing 2013 and refinancing in the dumper it’s entirely possible that rates might actually go somewhat lower.

At this point the real question regarding mortgage rates is not how long they can stay so low but whether they might actually go lower. It will be interesting to see what happens in September when real estate sales begin to slow after the summer.

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