January 2nd, 2020 8:53 AM by Jackie A. Graves
The year that’s winding
down will be remembered, in the real estate world, for its mortgage rates that
persistently and unexpectedly declined.
While rates aren’t going
to plunge another percentage point – November’s average rate for a 30-year
fixed mortgage was 3.7%, compared with 4.87% in the year-ago month, according
to Freddie Mac data
– they’re going to set some new lows, Fannie Mae said in a forecast.
The average fixed rate
probably will be 3.6% in 2020, which would be the lowest annual average ever
recorded in Freddie Mac records going back to 1973. It compares with 3.9% in
2019 and 4.5% in 2018, according to Fannie Mae. The current record was set in
2016 when the annual average fell to 3.65%.
Mortgage rates are set,
ultimately, by bond investors who keep a steely eye on inflation as a gauge of
the yields they are willing to take. Rising inflation eats into their returns
and leads to higher mortgage rates. In a low-inflation environment, like today,
they can still make money while taking low yields, which translates into low
rates for borrowers.
For shock therapy,
consider the annual average in 1981: 16.63%. That’s not the highest mortgage
rates ever booked. Looking at weekly averages, the rate hit 18.6% in mid-1980
as the economy struggled with stubborn inflation.
The man who broke the
back of inflation and made sub-4% mortgage rates possible, former Federal Reserve Chairman
Paul Volcker, died Dec.
8 at the age of 92.
When he was appointed by
President Jimmy Carter in 1979, he inherited an inflation cycle sparked when the
Fed succumbed to the strongarming of President Richard Nixon and opened the
money spigot at the wrong time.
We saw the ghost of Nixon reemerge this year as President Donald Trump tried to
strongarm current Fed Chairman Jerome Powell to cut rates below zero. It could
have provided a temporary goose to the economy and boosted the president’s
name-calling – Trump called Powell and other central bankers “boneheads,”
“losers,” “naïve” and an “enemy” of the U.S. with “No ‘guts,’ no sense, no
vision!” – the Fed refused to give up its independence. The world’s most
powerful central bank delivered three small cuts in 2019, ending the year at
On Thursday, Sweden – the
first country to experiment with below-zero rates after the 2008 financial
crisis – reversed course and raised its rate to zero. Other countries that have
experimented with below-zero rates, like Germany, haven’t seen it translate
into an economic boost. Germany’s economy in 2020 is expected to grow at about
half the 2.1% rate projected for the U.S., according to an International Monetary Fund forecast.
Fed meeting minutes
released Nov. 22 showed members unanimously opposed to caving to Trump’s demand
for negative rates. During the press conference following the Fed’s Dec.
11 meeting, Powell cited Volcker’s example of independence as the
“With courage, integrity,
and tenacity, he always pursued the policies that he believed ultimately would
benefit all Americans,” Powell said. “My colleagues and I continue to draw
inspiration from his example.”
Source: To view the original article click here