Recently, many people have argued that we will not return to low mortgage rates.
That there is no way we can go back to low mortgage rates.
The thing is, when they say that, they’re always thinking about mortgage rates of 3%, maybe 4%.
In fact, mortgage rates could drop slightly from current levels and be much higher than before.
Simply put, they can go down without being considered “down” again.
Remember When a 4.5% Mortgage Sounded Too High?
A few years ago, a friend of mine bought a house and took out an adjustable-rate mortgage (ARM).
At that time, he received a rate of 4.5%, which at the time sounded steep. Not attractive at all.
And again, it was ARM, so it’s not like it’s been cheap for 30 years. Both were priced higher than what everyone was used to and hadn’t been repaired in over five years.
At the time, 4.5% sounded too high. Why? Because we used to measure in twos and threes.
In the months before he closes his rate, he can still get a 30-year fixed rate at 3.25%.
So it’s always relative to what you’re used to. And he and everyone else used to see numbers starting with 2 or 3.
I wrote a while back that when we see high rates, our brain will think that a rate of 5% or 6% would seem really decent.
And now, with the benefit of hindsight, that cannot be true.
What Does a 5% Mortgage Rate Look Like Today?
If you introduced someone to a 5% loan today, they would say that sounds pretty good.
This is because they have been seeing prices starting at seven or eight recently.
So why wouldn’t it look good to see something that starts with five? Maybe even six at this point.
This is exactly the opposite of what happened when we went from 2% and 3% mortgages to 6%.
This is the silver lining that works in favor of loan rates right now.
Human psychology has a way of making things seem less bad when you’ve experienced the worst.
Last year, the 30-year average hit a nearly 21st-century high of 8%. Rates then went up and down to around 6% in September.
For the record, that high was 8.64% during the week of May 19, 2000, at Freddie Mac, and we’ve never been that close (we reached 7.79% at the end of October 2023).
It has since moved back to 7%, likely because Trump won a second term as president and many expect inflation to rise under his watch.
Where they go from here is another question, which I have already talked about.
What I Mean When I Say Mortgage Rates Could Fall
Now back to that “bottom” question.
Whenever I talk about mortgage rates now, I base them using the latest levels. While that may sound obvious, it seems to be lost on people often.
So when I say rates can go down again, or go down from here, it doesn’t mean they go back to 2% or 3%.
This means they can go from 6% to 5%.
The idea here is that it’s not a crazy return to what now feels like unsustainable lows.
It is simply a return to something in between. And when you think about it, something in between seems to make sense.
Like Goldilocks. Not too high, not too low. Maybe that’s right!
It is not too high to make housing more affordable and accessible to everyone.
But not so much that demand is rising and home prices are rising.
Granted, there is no strong correlation between housing prices and mortgage rates anyway.
But that’s been the narrative recently, given how low prices have been. Remember, they can collapse together if the economy weakens and fewer buyers are willing or able to buy homes.
Of course, it’s not really up to us to decide where rates go next, or the Fed for that matter. The direction of loan rates will be based on the strength or weakness of the economy.
The amount of government spending in the coming years may also play a role, as increased bond issuance may lead to lower bond prices, meaning higher interest rates will be compensated.
Let’s just hope that prices will find a good place that leads to a better balance in the housing market, where buyers and sellers can once again trade in a healthy way.
Read on: How to track loan amounts.
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