Low Rates Cheer Home Buyers, But Securities Investors Cooling
Courtney Allen and his bride counted themselves lucky to be looking for a home in the Park Slope section of Brooklyn last summer.
After hunting for months, Allen and his new wife settled on a vintage 1897 Victorian brownstone financed with a 30-year 7.62 percent fixed-rate mortgage.
“I feel as if we had the luck of the Irish because mortgage rates were down when we started looking for the loan,” said Allen, an investment banker with Goldman Sachs.
Like many Americans, Allen is finding that lenders are offering some of the lowest borrowing rates in two decades, thanks to the rally in the U.S. bond market.
The plunge in bond yields propelled 30-year rates to 7.33 percent last week from 9.23 percent a year ago, according to the Federal Home Loan Mortgage Corp.
Rates could fall even lower if slow economic growth and moderate inflation prompt the Federal Reserve to cut overnight bank rates for the first time since July, say lenders.
“You’ll probably be seeing 7 percent in the first quarter of next year” if yields keep falling, said Dan Kanaby, a senior vice president at Mellon Mortgage in Houston. ‘We’re slowly creeping down the ladder.”
Thirty-year mortgage rates tend to track the yields on mortgage-backed securities, which, in turn, take their cue from the 10-year Treasury note yield.
This year, the 10-year note yield plunged as bond investors bet the economy is expanding too slowly to generate inflation.
The combination of modest growth and a low inflation rate, known in financial circles as a “soft landing,” could help reduce yields in the next three or four months.
Bond investors are also optimistic that the Republican Congress and President Bill Clinton will soon agree on a plan to balance the federal budget for the first time since 1969. Such a plan would help lower rates by enabling the Treasury to sell fewer securities to finance the government’s spending.
The upshot for consumers is that it may soon get even cheaper to borrow money to buy a home or refinance.
The good news for consumers has been unwelcome to investors in the $1.4 trillion market for mortgage-backed securities, where loans are packaged together as securities and resold to investors. By providing lenders with a ready market for their loans, the mortgage-backed market helped cut mortgage rates by an estimated 0.5 percentage point in the past decade.
Bondholders’ appetite for those securities has waned as falling rates increase expectations for a rise in mortgage refinancings.
The weak demand for mortgage-backed bonds is no academic point for home buyers.
Thirty-year rates have averaged 8.03 percent this year, making 1995 the best year since 1993 for borrowers. If investors aren’t willing to pay as high a price for mortgage-backed bonds as they did in 1993, consumers may not see rates drop as much as they otherwise might.