Are 2-percent mortgage rates a real possibility in the future? Not so long ago, if you'd asked a group of economists and CEOs of home loan companies that question, your inquiry would probably have been greeted with either explosive laughter and much eye rolling or a stony silence with the same eye rolling. After that, you might have found yourself being interrogated about your beliefs concerning unicorns, fairies and the Loch Ness monster. It was unthinkable that rates on 30-year fixed-rate mortgages (FRMs) would dip below 3.00 percent in the foreseeable future.
Few Forecasting 2-Percent Mortgage Rates – Yet
That was then and this is now. Today, that same question would be heard respectfully and responded to seriously. Most experts would probably tell you they're not expecting rates to fall to those sorts of levels, but they're certainly not ruling it out.
If you look at the latest mortgage rate forecasts from some of the most expert economists working in the field, you'll be luckier than this writer if you find anyone suggesting sub-3 percent 30-year FRMs. Indeed, those closest to the issue, at Fannie Mae, Freddie Mac and the Mortgage Bankers Association, are all predicting rises in rates this year and next.
But they'd likely be the first to acknowledge that they might not be right. After all, they've been forecasting rate rises for a very long time, and by now they must be used to being proved wrong. That's not their fault, of course. All economic forecasts are based on assumptions about how economies and markets are going to act in the future, and economies and markets have rarely been as unpredictable as they have been over the last few years.
And their task has been made immeasurably harder by globalization. Time was when they only had to worry about how the American economy would do. Now, with money crossing national borders in huge quantities, investors in London, Shanghai, Frankfurt, Tokyo and elsewhere can affect U.S. mortgage rates almost as directly as those in New York.
Why Mortgage Rates Move
The rate you'll pay for a new fixed-rate mortgage is largely determined by supply and demand in the mortgage market at the time you "lock" (fix) your rate. If at that time, investors (who include the people who manage your pension fund and maybe some of your other investments) are worried about economic conditions either at home or abroad, they're likely to be buying lots of mortgage-backed securities, because those are regarded as a relatively safe investment, even if the returns on them are modest. But, during more confident times, those investors care less about safety and tend to put their money into riskier investments that offer higher rewards, such as stocks and shares. The law of supply and demand means that prices (rates in this case) fall when the supply of money increases. Of course, there's a lot more to it than that, but the rule almost always holds good: mortgage rates tend to rise and fall in line with how spooked investors are.
The American economy has not been doing badly recently, though it could be doing a whole lot better. But in this globalized era it seems there's always a country somewhere that's a cause for concern. In the last year, investors have been spooked by China's slowing growth rate, Greece's financial disaster and its potential for wrecking a number of other more important economies in the "eurozone" (the group of nations that share the euro currency), Japan's inability to shake off its decades-long stagnation, and the likely impact of Britain's decision to leave the European Union ("Brexit"). Meanwhile, at the time of writing, some foreign central banks (their equivalents of our Fed) are charging negative interest rates on deposits from banks, and some foreign government bonds are paying negative yields. In such a topsy-turvy environment – with some estimating that up to $10 trillion worldwide is currently invested at negative interest rates or yields – American mortgages can look very tempting to those around the world who are seeking some reasonably safe return on their money.
If and when the global economy regains its footing, mortgage rates will almost certainly go up. But few expect that to happen anytime soon, and some are wondering aloud whether a return to the old "normal" is ever going to occur. So low mortgage rates look likely to remain, at least for a while.
If things get worse globally or domestically, those rates might fall further, quite possibly breaking the 3-percent barrier. So to return to our original question: Are 2-percent mortgage rates a real possibility in the future? You bet.
Though, obviously, they could never drop below the 2-percent or 1-percent barriers or stray into negative territory. Unless ...
What This Means for You
As a homeowner, the prospect of such low rates on mortgages is fantastic. You can always refinance if they really do keep going down.
But, as an American and a human, you should be concerned that such rates will signal a global economy in crisis, with all the misery for millions or billions of people that implies. Indeed, if things get really bad, you could find yourself a victim of a worldwide depression. So be careful what you wish for.