Mortgage Rate Trend

According to the Federal Reserve Bank’s historical data going back to April of 1971, as of the end of April of 2010, the average mortgage rate for a conventional fixed rate first mortgage was 5.10%. This is within 22 basis points of the lowest monthly rate recorded—4.88% in November of 2009. Given that the average mortgage rate over this almost 40 year period is 8.98%, today’s interest rates are extremely attractive.

Mortgage rates have been on a generally downward trend since interest rates peaked in October of 1981. The high interest of the 1970’s was a response to the inflation caused by the 1973 oil shock. As the high inflation worked its way out of the United States economy, interest rates in general, and mortgage rates in specific, began to come down. November of 1990 was the last time that the average mortgage was above ten percent, in fact. Since then, mortgage rates have gradually trended back down to more normal levels, trading in a band from six to nine percent until 2003.

In January of 2003, the average mortgage carried a rate of 5.92%, although it had been on a significant downward trend since January of 2002. This is the first time that mortgages have been this low since the early 1960’s. Interest rates trended down as a reaction to both the post-9/11 recession and the dot com crash. With increased fear of risk in the economy, investors flocked to safe investments such as government bonds. Because residential mortgages were sold on the market with guarantees from Fannie Mae and Freddie Mac, which were considered to be roughly equivalent to government bonds, investors were willing to pay a premium for them, or, in other words, were willing to settle for a lower return from them.

After the subprime meltdown, the Federal Reserve Bank became an even more aggressive buyer of mortgages underwritten by Freddie and Fannie. Since December of 2008, rates have remained below 6%, with a long period of time below 5%. Given a lack of secure alternate investments in the market, buyers have continued to purchase government debt instruments, including residential mortgages. This has kept rates down and for as long as there is a lack of confidence about the economy, rates should remain low.

However, with increasing confidence in the economy, investor confidence in other, riskier, investments will increase. This is already evident in the significant recovery of the stock market from its low point. As this continues, interest rates on mortgages will have to move up to convince the investment community to make money available for this type of debt. Because of this, the window to take advantage of this extremely low mortgage rate trend is rapidly closing. Today’s mortgage market likely represents the chance of a lifetime for those who are able to take advantage of it.