Coronavirus has upended markets around the world. Its effect on the 30-year mortgage is especially significant.
By Orla McCaffreyJuly 16, 2020 10:05 am ET
In a year of financial firsts, this one stands out: Mortgage rates have fallen below the 3% mark.
The average rate on a 30-year fixed mortgage fell to 2.98%, mortgage-finance giant Freddie Mac FMCC -0.93% said Thursday, its lowest level in almost 50 years of record keeping. It is the third consecutive week and the seventh time this year that rates on America’s most popular home loan have hit a fresh low.
The coronavirus pandemic has upended markets around the world—sending stocks on a wild ride and yields on U.S. government debt to record lows—but its effect on the 30-year mortgage is especially significant. Consider its history: In the early 1980s, it peaked above 18% after the Federal Reserve raised rates to fight runaway inflation.
Below 3% is a “tremendous benchmark,” said Jeff Tucker, an economist at Zillow Group Inc. “It’s also an indication that we remain in a crisis here.”
Mortgage rates tend to move in the same direction as the yield on the 10-year Treasury note. Yields fall as prices rise when nervous investors buy up safe-haven assets like bonds when the economic forecast is darkening.
The spread between the yield on the 10-year Treasury and rate on the 30-year mortgage has narrowed in recent weeks, largely because lenders had spare capacity to process applications after clearing a backlog of refinacings. Still, the larger-than-usual gap means there is room for rates to fall even farther, Mr. Tucker said.
Not all mortgage rates have declined at the same pace. Interest rates on jumbo home loans, those too large to sell to Freddie Mac or Fannie Mae, FNMA -0.71% have fallen to around 3.77% from 3.84% at the beginning of the year. Earlier this year, some lenders placed new restrictions on these larger loans—in most markets, loans of more than $510,400—after the investors who typically buy them soured on loans without government backing.
Low mortgage rates typically boost home sales, but they did little to ease the pandemic’s impact on the housing market this spring. Existing-home sales fell 9.7% in May from the month prior and 17.8% in April, according to the National Association of Realtors.
A number of hurdles are keeping people from purchasing homes. A home purchase is out of the question for many of the millions of Americans who’ve lost their jobs in recent months. And fears that recurrent coronavirus outbreaks will lead to a protracted downturn could also keep some with the means to buy from committing to big purchases.Change in mortgage applications, weeklySource: Mortgage Bankers Association
For those who are looking to buy, inventory is tight and prices are high. The number of homes on the market fell 27.4% in June from a year earlier, according to Realtor.com. Home prices rose 4.7% year-over-year in April, potentially muting any savings from low rates.
Still, there are indications that some of the buyers who stayed home during the spring are venturing into the market. Mortgage purchase applications rose about 17% in June from a year earlier, according to data from the Mortgage Bankers Association. Economists at Fannie Mae expect sales to peak in July or August as the backlog of delayed spring deals is cleared.
Falling rates often prompt home buyers to speed up their purchasing plans. That was the case for Phillip Caldwell and his wife, Tracey, when they locked down a rate of 3% in late May, much lower than they expected.
The first-time home buyers decided to move from Seattle to Mr. Caldwell’s hometown of St. Louis, putting down an offer on a house in the Creve Coeur neighborhood in late spring. Shortly after, Mr. Caldwell set out for the 30-hour trip from Seattle to St. Louis with his husky, Rolland.
“A big factor that played in was that mortgage rates were going down,” Mr. Caldwell said. “We thought it might behoove us to get it done now.”
Tressie McMillan Cottom was thrilled when she was approved for a rate of 3.05%. “It meant I could look at a higher price point and more homes became available,” she said.
The college professor needed to find a house in the Chapel Hill, N.C., area and she knew competition would be fierce. Her Richmond, Va., house sold in hours when she listed it in early July.
“On my second trip to Chapel Hill, I just came with my checkbook and told my agent ‘We’re picking one of these,’” she said.