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Why Interest Rates Should Be 3.4%

  • February 22nd 2012

by UrbanTurf Staff

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Why Interest Rates Should Be 3.4%: Figure 1

This morning, The Wall Street Journal had an intriguing article as to why long-term mortgage rates should be even lower than their already-historic lows.

The piece points to the fact that the gap between what borrowers pay for mortgages and the rate that investors pay for bonds backed by home loans is getting wider. On Tuesday, it was 0.96 percent; historically it has hovered around .5 percent.

The Wall Street Journal unfortunately does not get into the financial nitty gritty of how the gap translates into lower rates, but it did offer this:

To be sure, consumers are seeing the lowest rates in several generations already. If history is any guide, it should be a lot lower. With yields on mortgage-backed securities at these levels, the 30-year fixed rate mortgages would be roughly 3.40% if the spread was around its historical average of 0.50 percentage points.

So, why aren’t rates even lower? A couple of reasons provided included that fewer banks are doing the majority of lending these days, so they don’t need to offer “rock bottom prices” and the increased regulations and risks associated with the mortgage market.

This article originally published at http://dc.urbanturf.production.logicbrush.com/articles/blog/why_interest_rates_should_be_3.4/5174.

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