The average 30-year fixed rate mortgage (FRM) rate fell to 3.62% in the week ending January 10, 2020. The 15-year FRM rate decreased slightly to 3.27%. FRM rates rose significantly in 2018, but fell back in 2019, now well below a year earlier. The long-term rising trend has briefly stalled as the Federal Reserve (the Fed) drops interest rates as we head into the coming recession, expected in 2020. In response, expect interest rates to remain low for the next several months.
Rising interest rates discouraged homebuyers and decreased their purchasing power in 2018, causing sales volume and prices to slip going into 2019. Now begun, the downward trajectory for prices and sales volume will continue in 2020, not to recover until after the next recession is over, in 2021-2023.
FRM rates are tied to the bond market, tending to move in tandem with the 10-year Treasury Note (T-Note) rate. Bond market investors are feeling discouraged in light of the slowing economy and instability emanating from the federal government. This has led them to accept lower yields in return for the safety of treasuries, which in turn has kept FRM rates down in recent weeks. FRM rates will remain low over the next two-to-three years.
The spread between the 10-year T-Note and 30-year FRM rate is 1.78%, above the historical difference of 1.5%. The higher margins seen through much of 2018-2019 signify that mortgage lenders, uncertain of the market’s future, are padding their risk premiums.
The average monthly rate on ARMs was 4.0% in December 2019, far above its low point of 2.49% experienced in May 2013. The average ARM rate is actually higher than the average 30-year FRM rate, making these riskier mortgage products even less appealing. As interest rates fell back in 2019, the spread between the ARM and FRM rates has diminished and now inverted. Therefore, ARM use will remain extremely low over the next couple of years, as the Fed will work to keep interest rates on FRMs low as the economy slows and a recession arrives, projected to hit by late-2020.