When lenders stop pricing in a risk premium, perhaps as low as 2.75%.
The Federal Reserve’s pledge on Monday to buy unlimited amounts of Treasuries and mortgage bonds to stabilize the markets may have the same effect as when it rescued the economy in 2008: New lows for home-loan rates.
Nine days ago, the Fed set a budget of $700 billion in bond purchases. It blew through half that amount in five days as it tried to keep credit markets from drying up.
“The Fed will likely do what they did after the financial crisis: Keep liquidity as high as possible and that will keep mortgage rates low,” said Joel Naroff, president of Naroff Economics. “The Fed has once again, as it did in the financial crisis, in essence, become the lender of last resort.”
The Fed launched three rounds of bond-buying more than a decade ago aimed at saving the housing market and stimulating economic growth during the financial crisis. The first phase, started in December 2008, helped to drive mortgage rates below 5% for the first time ever.
The goal of the central bank – then and now – isn’t to push down mortgage rates, Naroff said. Lower rates are the likely consequence of throwing billions of dollars mortgage-backed securities. “Obviously the explosion of liquidity is going to drive rates down,” Naroff said. “The Fed will likely do what it did after the financial crisis – keep liquidity as high as possible, and that will keep rates low.”
How low could they go? A 30-year fixed rate of 2.75% is possible, Naroff said, basing his estimate on bond yields, which act as a benchmark for mortgage investors.
The week before the COVID-19 pandemic shocked the markets, the average U.S. rate for a 30-year fixed mortgage fell to 3.29%, the lowest ever recorded by Freddie Mac in a series that goes back to 1971.
Last week, the rate was 3.65%, representing an abnormally broad spread – or difference – between Treasury yields and mortgage rates as nervous investors kept a buffer called a “risk premium.”
That margin is likely to narrow in coming weeks, Naroff said. “Where should mortgage rates be?” said Naroff. Based on bond yields, “in the 3% range, plus or minus 25 basis points. Could you get a new low? I wouldn’t be surprised.”
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