According to data from HSH Associates, 30-year mortgage rates took a slight dip in September 2009, falling from a national average of 5.68% in August to 5.52%. That marked the third consecutive monthly decline for 30-year mortgage rates--but these recent declines tell only part of the story. A longer term perspective shows that this has been an extraordinary year for mortgage rates.
In fact, while 2009 may have seemed like an ugly year for the mortgage and housing markets, people who secure a mortgage this year may look back on this as the best mortgage environment of their lifetime. To understand just how exceptional current mortgage rates are, it is helpful to look at some mortgage rate history.
Current Mortgage Rates in Perspective
Mortgage rate statistics on HSH.com show that rates have operated within a fairly narrow band this year, with only 44 basis points (0.44%) between the high and low monthly averages for January through September. The Federal Reserve's mortgage data series shows a similar level of stability, with monthly averages from January through September varying by only 61 basis points (0.61%).
This stability, though, does not mean that the rate environment is unremarkable. According to the Federal Reserve data series, which goes back to 1971, the eight lowest months ever for 30-year mortgages occurred in 2009. This year has also been the only year in which monthly averages for 30-year mortgage rates has dropped below 5.0%. In fact, average 30-year mortgage rates have been below 6% in fewer than 10% of the months since 1971, yet they have spent this entire year so far in that territory. In short, month-to-month fluctuations may be modest this year, but overall rates have come a long way down from their historical norms.
Mortgage Rates: Defining "Normal"
This raises an interesting question: exactly what are normal levels for mortgage rates? There are several ways of answering that question.
Over the years, 30-year mortgage rates have ranged from a low of 4.81% to a high of 18.45%. That's a difference of 13.64%. To think of it another way, the high for mortgage rates is more than three times the lowest rate ever. This doesn't say much about what a normal mortgage rate would be, but it does tell you that mortgage rates are highly variable.
A simple average of all the monthly mortgage rates in the Federal Reserve data series would be 9.03%. The median of all those monthly mortgage rates is 8.51%. These figures say quite a bit about today's mortgage rates. A 9.03% or 8.51% mortgage would be considered very high by today's mortgage rate standards, but these are actually the norms. The average rates we've seen this year have consistently been 3% to 4% below these norms.
There is one more way to look at what the history of mortgage rates would define as normal. Considering mortgage rates in 1% increments (i.e., 4% to 5%, 5% to 6%, etc.), the most commonly recurring rates have been those in the 7% to 8% range. There have been 94 such monthly occurrences since 1971, compared with only 40 monthly averages in the 5% to 6% range--where mortgage rates lie today.
Likelihood of a Move In Interest Rates
If normal rates can be defined as being somewhere in the 7% to 9% range, history underscores how unusually low rates are today. The next question, then, is how likely rates are to return to that normal range--or at least climb from today's near-record low levels.
For rates to jump by 2% or more in one year would be unusual but not unprecedented. Rates have varied by as much as 4.14% within the course of a single year (as occurred in 1980). The average spread between high and low within a single year is 1.25%, and these variances have been 1% or more in 24 of the last 37 years (or 65% of the time).
In short, history shows that a) 30-year mortgage rates are normally much higher than today's mortgage rates, and b) that these rates are capable of making substantial jumps within the course of a given year. This would suggest an increase in rates is likely, but while history is a useful indicator of what the market is capable of, history does not repeat itself in an orderly manner. It is even possible, though not likely, that rates could fall even more from their current levels.
Rates are so unusually low right now that what is likely is that any prospective home buyer or homeowner looking to refinance who hesitates to act on this opportunity may be kicking themselves for years to come.
Richard Barrington
Richard Barrington is a freelance writer and novelist who previously spent over twenty years as an investment industry executive.
