Mortgage Rates Fall to New Record Lows

Freddie Mac reported today that the average rate on 30-year fixed mortgages fell to 4.09% this week, down from 4.12% last week, and the lowest rate since the early 1950s (see top chart below, news report here).  The 15-year fixed rate fell to 3.30% this week from 3.33% last week, setting a new all-time record low (see bottom chart below).

To purchase a median priced existing home at $174,000 (most recent data available is for July) with a 20% down payment, the monthly payments at 4.09% would be $671.80.  In 2008, when the median priced home averaged $198,100 and the 30-year mortgage rate averaged 6.04%, the monthly payments (with 20% down) would be $954.25, or 42% higher than the current monthly payment of $671.80.

With rates so low, and home prices stable or falling, there’s probably never been a better time to buy or refinance a home.  With annual inflation of 3.8% through August, getting a 4.09% 30-year fixed rate mortgage is basically “free money” at close to a 0% real rate (assuming inflation remains at 3.8%).  If you lock in at 4.09% and inflation rises above that rate for some part of the next 30 years, you’ll have a negative real rate of interest and you’ll pay back less in real dollars than the amount you borrowed – the best of all possible worlds for a borrower.  With a 15-year fixed rate of 3.30% and 3.80% inflation, you’re starting out with a negative real rate of -.50% (assuming inflation continues at 3.8%).

If you can borrow $100 and pay back $98 in inflation-adjusted dollars, you’re getting paid by the bank to be in debt.  (In that case, it’s just like a “negative price” for goods, where you get free merchandise and some cash on the way out of  the store – the ideal outcome for consumers.)

Bottom Line: The record low mortgage rates and possible negative real interest rates are a great deal for borrowers, but a terrible deal for lenders – are we headed for another S&L crisis?

About Mark J. Perry 262 Articles

Affiliation: University of Michigan

Dr. Mark J. Perry is a professor of economics and finance in the School of Management at the Flint campus of the University of Michigan.

He holds two graduate degrees in economics (M.A. and Ph.D.) from George Mason University in Washington, D.C. and an MBA degree in finance from the Curtis L. Carlson School of Management at the University of Minnesota.

Since 1997, Professor Perry has been a member of the Board of Scholars for the Mackinac Center for Public Policy, a nonpartisan research and public policy institute in Michigan.

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