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Mortgage Rates Hit New Record Low, but it Won’t Last Long

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Saturday June 13, 2020
Mortgage Rates Hit New Record Low, but it Won’t Last Long

We have written quite a bit about mortgage rates over the last few months, noting how low they were. Recently, the mortgage rates have been fluctuating in a rather unpredictable manner; yesterday they (on average) set a new record low at 2.94%.; .3% lower than Friday of last week. This article will briefly discuss why the mortgage rates have been fluctuating so significantly.  
Briefly, mortgage rates have been fluctuating as a direct result of the increased number of refinance applications; these refinance applications, in turn, were the direct result of record low mortgage rates. As we noted above, the average mortgage rate rose to 3.24% last Friday, shortly after the better-than-expect jobs report. The drop to 2.94% comes on the heels of the Fed’s announcement, which encouraged investors to pursue mortgage bonds. Currently, most lenders are offering mortgage rates of 2.875%; these rates are only available for the most financially stable borrowers (near-perfect credit, high down payments, and no other factors cutting against favorable terms). 
The fact that these loans are only being made to the most financially secure applicants should come as a relief, as the way this is being accomplished is eerily similar to practices that precipitated the Great Recession in 2008. Lenders don’t like to hold onto mortgages, because it reduces the amount of cash-on-hand they need to make other loans. In order to free up cash, lenders package their loans (mortgage bonds) and sell them on a secondary mortgage market. These bundled mortgages are less lucrative investments than the stock market, but offer a significant degree of safety (again, because this time around the mortgages are only being offered to people who are extremely unlikely to default on their loans). 
As a general rule, investors prefer to invest in the stock market when the economy is doing well; the market offers a better return-on-investment (“ROI”) as well as a higher risk of loss. When the economy is not doing well, investors opt for bonds, and bond-like investments, which offer more security but less ROI. While the May jobs report was a step in the right direction, it tells us that the economy is not strong yet. As a result, most investors are investing in these secondary market mortgage bundles. There is an inverse correlation between bond prices and mortgage rates; when bond prices go up, mortgage rates go down. Since investors are responding to the May jobs report by investing in the mortgage bundles (call them bonds for sake of ease), the cost of those bonds is increasing; this means mortgage rates are falling. 
We are in a unique position to understand when mortgage rates will increase above 3%. When the economy begins to show signs of robust recovery (we are officially in a recession right now), investors will slowly move their money out of bonds and back into the stock market. As that happens, the price of those bonds will decrease, and mortgage rates will increase. Since we are barely below 3% right now, mortgage rates should climb above 3% at the first sign that we are out of a recession. All of this is a long way of saying that now is an ideal time for people with stable finances to look at the housing market as a must-use investment; houses always appreciate in value, and you will never get more favorable loan terms than you can get now. 
At the Chernov Team we understand that knowledge is power, and knowledge of where mortgage rates are headed is powerful knowledge indeed. At the Chernov Team we know that whoever comes to the table most prepared leaves with he most, and the Chernov Team always leaves the table with the most. 

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