Mortgage rates have fallen to record highs eight times in 2020 so far as the coronavirus pandemic has shaken the global economy.

But could they finally fall to 0%? Well, if the past past is any indication, there is indeed a chance.

Freddie Mac FMCC,
+ 0.12%
Deputy Chief Economist Len Kiefer posted on Twitter TWTR,
+ 0.53%
a graph showing the movements in the average 30-year fixed-rate mortgage rate after the Great Recession. As he pointed out, interest rates on home loans fell in four of the five years after the 2008 financial crisis, falling by about three percentage points.

This week, mortgage rates edged up. The 30-year fixed-rate mortgage averaged 2.96% for the week ending August 13, up eight basis points from the previous week, Freddie Mac reported Thursday. The 15-year fixed rate mortgage averaged 2.46%, while the 5-year Treasury indexed variable rate hybrid mortgage was 2.9%. The week before, mortgage rates had fallen to an all-time high for the eighth time this year.

So if we were to see a repeat of what happened after the Great Recession, rates would effectively drop to 0%, or even negative territory. Predicting if this will happen is not that simple.

“Interest rates are very difficult to predict,” Kiefer told MarketWatch. “Economists, including me, haven’t had a great track record of predicting where rates will go. For many years people said that rates were going up, and they ended up going down. “

A 0% mortgage is not a fantasy – in fact, it is reality on the other side of the pond. In Denmark, Jyske Bank JYSK,
+ 0.14%
started offering a 10-year fixed rate mortgage at minus 0.5% last year, and Finnish bank Nordea announced around the same time that it was offering Denmark a fixed rate mortgage of 20 years without interest.

“For many years people said rates were going up, and they ended up going down.”


– Len Kiefer, Deputy Chief Economist at Freddie Mac

But economists say there are plenty of reasons to believe mortgage rates won’t fall to 0% or lower in the United States anytime soon. For example, Freddie Mac’s most recent forecast estimated that the 30-year mortgage would average 3.2% in 2021, not too far from its current level.

In large part, that’s because the Federal Reserve probably wouldn’t let that happen. The Fed does not directly control mortgage rates. Instead, mortgage rates have roughly followed the direction of long-term bond yields, particularly the 10-year T-bill TMUBMUSD10Y,
1.491%.

However, expectations about the Fed’s interest rate policy are built into the yields of these bonds and mortgage rates. When the pandemic became a major concern, the Federal Reserve decided to cut the short-term federal funds rate to zero – and of course, since then the 10-year Treasury yield and the 30-year mortgage rate have fallen. at record levels. .

For 0% mortgages to become a reality, “we would probably have to see negative federal funds rates,” said Danielle Hale, chief economist at Realtor.com.

Central bank rates in Denmark were negative for about five years before mortgage rates hit zero,” Hale added. “The Fed has made it clear that this is not its preferred course of action.”

It would take a lot for the Fed to take negative rates, possibly including a major demographic shift.

“The American population is much younger than Europe or Japan,” Kiefer said. “Maybe 10 years from now, depending on immigration and other things, we might be more like them. If this is one of the driving factors behind inflation – we don’t know for sure, but it’s a theory – then this could be what we might be looking at. “

“Central bank rates in Denmark were negative for about five years before mortgage rates hit zero.”


– Danielle Hale, Chief Economist at Realtor.com

In other words, the aging of the population in Western Europe and Japan could explain the slowdown in economic growth in these regions. And it would take a serious and prolonged slowdown in US GDP or labor market growth for the Fed to feel comfortable pushing rates into negative territory.

Yet even if that happens, rates could still stay above 0%, and that’s because of the role that mortgage-backed securities investors play. “Mortgage rates are determined by investor demand for mortgage bonds,” said Matthew Speakman, economist at Zillow ZG,
+ 1.96%.

“A sharp drop in rates would likely lead to an increase in the demand for refinancing, and loans that generate only a few payments before being refinanced are unprofitable for investors,” said Speakman. “This dynamic would weaken investor demand and lead to higher rates.”

In addition, mortgages carry certain risks, as homeowners could miss payments and default. With that risk comes a premium that translates into a higher interest rate compared to the yield on the 10-year Treasury and other investments, Speakman said.

While mortgage rates are unlikely to fall to 0% on average, that doesn’t mean that one or two lenders might not be flirting with the idea. United Wholesale Mortgage, for example, started to advertise a 30-year fixed rate mortgage at just 1.99% – although the low interest rate comes with high fees.

“When we survey lenders, we see a variety of interest rates,” Kiefer said. “It can be very beneficial for them to shop around because they can get very different quotes depending on who they’re talking to. “

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