Mortgage Rates Below 5% Indicate Inflation Will Be Low

McLean, VA – Freddie Mac today released the results of its Primary Mortgage Market Survey in which the 30-year fixed-rate mortgage (FRM) averaged 4.92% with an average 0.7 point for the week ending October 15, 2009, up from last week when it averaged 4.87%. Last year at this time, the 30-year FRM averaged 6.46%.

"Mortgage rates rose slightly over the week, but rates on 30-year fixed mortgages remained below 5% for the third consecutive week," said Frank Nothaft, Freddie Mac vice president and chief economist. "Homeowners are taking advantage of these low rates to refinance their current balances. Over the past five weeks ending October 9, more than three out of five mortgage applications were for refinancing, according the Mortgage Bankers Association.

The chart above shows monthly mortgage rates back to 1965 to help put the current situation into perspective. There has never been any comparable period since the 1960s when 30-year mortgage rates have remained so low for so long. On a weekly basis, mortgage rates have been below 5% for fourteen weeks so far in 2009, including the last three weeks.

Mortgage rates climbed to historically high levels in the late 1970s and early 1980s because of historically high levels of actual inflation and expected inflation.

If inflationary pressures are now building up in the U.S. economy, and future inflation is expected to rise, why aren't those inflationary pressures being reflected in the bond market (see related CD post) or the mortgage market? For those worried about future inflation, this would be a great time to re-finance your mortgage at the current rates of below 5% for 30 years. All it would take is an actual inflation rate of above 5% sometime during the next 30 years to result in a negative, real interest rate, the best of all possible worlds for a borrower (it's like borrowing $100 from a bank, but only have to pay back $99, $95 or $90 in real dollars).

Comments

[Dave Wrixon:]

Because the main buyer of bonds is simply creating money out of fresh air so he doesn't worry that he is not getting a return on his investment.

Oct 18 05:40 AM

[Dave Wrixon:]

As Madoff clearly demonstrated, IF you have a never ending supply of fresh money, you can actually payout more than the individual investments are yielding.

But as Madoff also showed that is big IF.

Oct 18 05:47 AM

[Michael Clark:]

Is there a different situation between the markets (relative free markets) determining a mortgage rate below 5% and a Monetary Czar insisting that mortgage rates say below 5% through massive manipulation of the markets? All historical comparisons are OFF because Bernanke -- the Master of the Universe -- is not letting the markets determine where money should be, he is determining where money should be. If Bernie wasn't forcing rates down with all his trillions, mortgage rates would NOT be where they are now -- and neither would treasury yields be this low.

The whole system now is a fraud, due to a king's determination to insist that reality follow his dictates. Bernie's 'Viagra Rally' (a different form of 'cash for clunkers') is an artificial high -- and we don't really have a lot of good historical data for artificial highs. We've had Chairman Mao's in the Fed manipulate markets through Fed Funds manipulation -- but we've never had a Chairman print money and give it to his friends to buy a stock market rally and use his own apparently unlimited account to buy every TBill and TBond that no one else is willing to buy, simply in order to present a good face to the public and also to keep interest rates from rising.

None of the standard historical indicators work in an environment that is so artificially constructed. The World According to King Ben. Obama step back. The real King is saving the world for the rich and famous.

Oct 18 06:06 AM

[The Geoffster:]

"The central bank is an institution of the most deadly hostility existing against the Principles and form of our Constitution. I am an Enemy to all banks discounting bills or notes for anything but Coin. If the American People allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the People of all their Property until their Children will wake up homeless on the continent their Fathers conquered. "
-Thomas Jefferson

Oct 18 04:03 PM