July 12th, 2016 2:47 PM by Robin Bain
stimulates the housing market like falling interest rates, and just because
mortgage rates are low doesn't mean they won't go lower. A low mortgage annual
percentage rate (APR) lets you afford to take out larger loans and buy costlier
properties. As the 10-year Treasury note yield hit record lows last week, can a
3%, 30-year mortgage be in America's future?
The answer in
part depends on how much of the rate windfall the banks intend to keep for
themselves and how much they will pass on to their customers.
The measure of
how well the banks are sharing the benefits of falling rates is a number called
rate spread. This is the difference between the national average interest rate
on 30-year fixed rate mortgage (3.43% at the close of last week) and the yield
on the 10-year Treasury note (1.3%). The spread has recently been growing and,
at 2.07 percentage points, now stands at one of its highest levels since 2012.
Now, that's great for banks' bottom lines, but not so much for yours.
borrowers and refinancers benefit as rates fall. But by widening their
mortgage-rate spreads, banks hope to capture more of the benefit for
themselves. It's too easy to paint this as the greedy big banker sticking it to
the little mortgage shopper.
The truth is
a little subtler: banks are in a profit squeeze right now, and mortgage spreads
are one of the few ways they can earn some money for investors and their
has to do with another spread; the margin spread. This is the difference of
what banks charge their borrowers and what banks pay to depositors. With the
interest rates on savings accounts already anaemic, the falling Treasury yields
do not allow banks to slash returns on deposits any further in a bid to reduce
their own cost of borrowing.
At the same
time, falling rates mean that banks earn less interest on their loans. Fixed
costs and lower revenues obviously do not make a banker happy to say the least.
Expanding the mortgage rate spread will only go so far, too.
is that mortgage rates are "sticky" right now. According
to the publisher of Inside Mortgage Finance, Guy Cecala, current mortgage rates
should be about 0.2 percentage points lower than they are, based on the
historical behavior of the mortgage rate spread.
whenever mortgage APRs dip below 3.5%, it's a great time to take out a
mortgage, since this is a fairly rare occurrence. According to the Mortgage
Bankers Association, consumers are responding to the falling rates by increasing
their mortgage applications, which were up 14.2% in the last week of June from
the week earlier.
it's the rise in demand that allows banks to keep their mortgage rate spreads
fat. A 3% mortgage rate might be on the horizon if interest rates continue to
fall, but first, demand for mortgages at their current rates will have to be
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