Why are mortgage rates so low?
Q: Mortgage rates at the start of the year declined and, so far, seem lower than much of 2018. How is this possible given that the Federal Reserve raised bank rates four times last year?
A: There’s no one factor that causes mortgage rates to rise or fall. As the expression goes, it’s complicated.
It’s true that in 2018 the Federal Reserve raised interest rates for banks four times. The Federal Funds rate went from 1.5 percent to 2.5 percent. These increases surely contributed to very good bank results. FDIC-insured banks and savings institutions saw full-year net income reach $236.7 billion. That’s up 44.1 percent from 2017.
Meanwhile, mortgage rates have not kept up. That’s because a lot of mortgages are funded by non-banks outside the Federal Reserve system. Their rates reflect supply and demand and it turns out there’s a lot of supply and less demand.
The Dodd-Frank legislation from 2010 was designed to reduce risk in the mortgage marketplace. No more no-doc financing or toxic mortgage formats. One result is that today, U.S. mortgages are a nice, safe investment with generally little risk.
“The overall national mortgage delinquency rate in the fourth quarter was at its lowest level since the first quarter of 2000,” said Marina Walsh, vice president of industry analysis for the Mortgage Bankers Association. “What’s even more noteworthy, the delinquency rate dropped from the previous quarter and on a year-over-year basis across all loan types and stages of delinquency.”
But remember — mortgage rates reflect both supply and demand. While supply is strong, there’s limited demand. For one thing, refinancing is down because homeowners have little incentive to replace recent mortgages with rates in the 3 percent and low 4 percent range.
On the purchase side, in January the National Association of Realtors reported that the seasonally adjusted annual sales rate stood at 4.94 million units, down from 5.40 million units a year earlier. That means almost half a million fewer sales and thus, the need for a lot less mortgage financing.
For new homes the story is better. In February, the government reported that an estimated 1,246,600 housing units were started in 2018, up 3.6 percent from a year earlier.
Putting it all together, we have a lot of money available to borrowers, few delinquencies or foreclosures, fewer overall home sales, and little need for refinancing. There’s a plain demand for mortgage money — but not as much demand as the market needs to force up rates. Meanwhile, the Fed’s efforts to artificially raise mortgage costs were derailed, overcome by the natural forces of supply and demand.