Mortgage rates will remain low because the banks and the economy can’t accommodate the loss of sales and lower house prices bound to accompany higher rates.

“Stock prices have reached what looks like a permanently high plateau.”

– Irving Fisher, Ph.D. in economics, Oct. 17, 1929

“We will not have any more crashes in our time.”

– John Maynard Keynes in 1927

When something goes on for a long time, particularly something the defies previously accepted truths, eventually people come to believe it will go on forever. Everyone thought the economic prosperity of the 1920s would go on forever. Few foresaw the stock market crash of 1929 and the Great Depression of the 1930s. Investors and economists are particularly prone to this problem, often projecting short-term trends to infinity.

For the last several years now, pretty much everyone predicted interest rates would rise. Year after year, we were told mortgage rates would rise to 5% and then to 6% shortly thereafter. Every year the pundits were wrong.

In January I wrote that Mortgage interest rates may not go up, housing may prosper in 2016. Like many others who expected interest rates to rise, I’m starting to come around to the idea that low mortgage rates may be with us for a very long time. In fact, I now believe mortgage interest rates can’t go up unless we have a huge increase in demand for housing, which doesn’t seem likely any time soon.

Perhaps I am wrong, and my acceptance of low rates is the capitulation signalling the bottom of the market. I could be just as wrong as Irving Fisher and John Keynes were during the booming 20s. Only time will tell.

March 10, 2016, Brena Swanson

Despite increasing for the second week in a row, mortgage rates are still well below levels seen at the end of last year. According to Freddie Mac’s latest Primary Mortgage Market Survey for the week of March 10, this is only the second increase this year, making mortgage rates very attractive for the upcoming spring home-buying season. The 30-year fixed-rate mortgage averaged 3.68%, up from last week’s 3.64%. A year ago, the 30-year FRM averaged 3.86%.

Why mortgage rates will remain low

The federal reserve keeps mortgage interest rates low by ongoing quantitative easing. The federal reserve reinvests principal payments from agency debt and mortgage-backed securities back into mortgages. Though smaller than the $40 billion per month stimulus of the reflation rally, it’s still a large number, and this money bids up the price of mortgage-backed securities and keeps mortgage interest rates low.

As long as the federal reserve maintains it’s policy of printing money to buy mortgages, the only way mortgage rates can go up significantly is if consumer demand for mortgage debt greatly exceeds the supply offered by the federal reserve and private investors. Right now home sales are still well below historic norms, and the demand for safe-haven investments like government-backed mortgages is very high. Supply and demand dynamics favor continued low mortgage rates.

In the post US housing market finds strength in the eye of a financial hurricane, I described how instability in the financial markets drives investors to 10-year Treasuries, the closest proxy for mortgage-backed securities. This amps up the investor demand for mortgages as well, keeping mortgage rates low.

Even if bond holders shy away from 10-year Treasuries and the federal reserve raises the federal funds rate, it doesn’t mean mortgage rates must rise. During the housing bubble the federal funds rate went up considerably without much impact on mortgage rates. Plus, the federal reserve could always decide to purchase more mortgage bonds as it deems necessary to hold rates down.

Why mortgage rates must remain low

Rising mortgage interest rates will hurt the banks by making it more difficult to reflate the housing bubble. As long as there are underwater owners, the federal reserve will do whatever is necessary to inflate house prices in order to bail out the banks. The banks can’t survive higher mortgage rates.

If mortgage rates were to rise, it would cause a dramatic decline in home sales because cloud inventory restrictions prevents owners from lowering their prices. This would cause so many problems with housing that the federal reserve would need to increase it’s bond purchase program (printing money) to lower rates to keep the housing market functioning.

If the federal reserve failed to act, and if mortgage rates were allowed to drift up to 5% or 6% or higher, we would endure a complete collapse in sales volumes and massive unemployment among homebuilders, realtors, and mortgage loan officers, causing house prices to fall again, exposing banks to tremendous losses. Given those problems almost certain to accompany higher rates, it simply won’t be allowed to happen — even if that means the federal reserve buys every mortgage in America.

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