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PBNR, February 2009–Mortgage interest rates are finally coming down thanks to a number of actions by the Federal Housing Finance Agency (FHFA), the Treasury Department, and the Federal Reserve (Fed). At the time of this writing (early January), Freddie Mac announced rates on 30-year fixed rate loans had reached historic lows, around 5% with a little less than 1 point down. The Federal Reserve also announced it was implementing its $500 billion Mortgage Backed Securities (MBS) purchasing program, undoubtedly providing downward impetus for rates for the time being. The National Association of Realtors® (NAR) has been strongly advocating such actions since early October 2008 through meetings with the government and letters to key officials. NAR is encouraged by the Fed’s actions as well as actions by Treasury and FHFA to restore consistency in the mortgage market. NAR will be working with the new administration to further these gains.

Even with rates down to 5% (and perhaps lower by the time this is published), the spread between the benchmark 10 year Treasury Note and the 30 year mortgage rate is around a 20 year high, as much as 300 basis points at times. The Fed program should shrink that spread. Nevertheless, a number of factors could counteract this effort.

Even with tighter lending standards there is no guarantee that spreads will return to 160 basis points, the approximate historic median according to the Federal Reserve Bank of Cleveland. The spread is essentially the risk premium between government debt and mortgage debt. The mortgage and financial crisis has left a mark on risk premiums of all kinds. Furthermore, the precarious economic situation and uncertainty about the long term implications of previous corrective measures may ultimately work against declining risk premiums and/or declining mortgage rates. Unprecedented injections of liquidity have led more than a few economists to express concerns about long term inflation potential. Fears of long term inflation may cause investors to demand higher yields on all long term debt instruments and reduce or eliminate downward pressure on interest rates. Indications of inflation will most certainly cause the Fed to reexamine policy and any actions to stem inflation will likely lead to higher rates. Of course this is not happening now and there are many who are concerned about deflation today as well. But things can change painfully quickly as we have seen over the past year.

Another factor that may affect long term rates is the massive issuance of Treasury debt. At present, Treasury debt is benefitting from a “flight to safety.” Investors, so fearful of losing their investments, are purchasing government debt at dramatically low yields. We have even seen instances where investors are parking cash in short-term Treasuries for virtually no return simply to ensure that their money is still there a month from now.

There is no guarantee that this will continue. The more supply of debt instruments, the greater the likelihood that demand will not be able to keep up, which will send interest rates higher. In turn, mortgage rates will then likely go proportionately higher as well, regardless of the spread both because of the increased supply of debt instruments and the relative competition between various debt instruments for investment capital.

While we are seeing a downward trend in mortgage rates and NAR continues to advocate for tightening interest rate spreads and reducing unnecessary fees particularly by the GSEs, it is far from certain that rates will drop to levels in line with 160 basis point spread and it is far from certain that Treasury rates will remain at the dramatically low levels we have seen. Today, the 10 year bond is yielding in the 2.5% range but has been fluctuating significantly. There are a lot of variables at play and there is no guarantee that the bond yield will stay this low. I have not even mentioned the volatile value of the dollar, which is also a variable that influences interest rates for all debt.

So what does this mean? It means people should not be trying to time the market. Housing affordability is at its highest level since NAR began publishing its index in 1988. Prices have dropped substantially in most markets and dramatically in many. Interest rates are lower than they have been in generations (and if they fall significantly after the purchase, there is always the chance to refinance). Buyers are in the sweetest of sweet spots and staying “on the fence” is getting risky. How would someone feel if they lost the home of their dreams because they were waiting for interest rates to drop another quarter point and that didn’t happen? How would someone feel if they lost the home of their dreams because they thought it was going to drop another few thousand dollars in price and someone else came in and snatched it up? These are very important questions to consider because regretting lost opportunities happens all the time in life. Owning a home is still the American dream and buyers really should consider whether they are letting that dream pass them by trying to do the impossible-time the market.

Kenneth R. Trepeta Esq. is the director of NAR Real Estate Services. For more information, please e-mail him at