The mortgage rate resting state: Understanding the new normal

I’m bald. December is “toboggan time” for me. I lose them often. I rely on them like an appendage. After a few maddening minutes of searching as I’m walking out the door, I succumb to eventual embarrassment by finding one right there in my coat pocket, waiting patiently.  

Perspective can be like this. It’s right there, but we lost it. We had it but now it’s vanished, leaving panic. Invariably, we can even invent false narratives. “I bet Ashley put it somewhere!”

In our short-attention-span-theater world, it’s easy to lose perspective on mortgage rates. Like a shopping cart with a bad wheel, we have a natural tendency to pull our expectations in a direction that may not track reality. As a pilot, you’re taught to trust your instruments, not your feelings. With financial matters, we should trust the data, not the gut.  

In that spirit: What is the Mortgage Rate Resting State? Where should we align our expectations for the normal state of mortgage interest rates? 

A familiar comment from homebuyers is one I’ll dub “The Refinance Refrain.” The refrain finds its voice when a client opts for a disadvantageous long-term rate because they are planning to refinance when rates come back down next year. I’ve heard a steady chorus of The Refinance Refrain since mid-2022. Hell, I probably hummed a few bars myself. 

For context, a no-points interest rate is higher than one where the buyer pays some semblance of discount points. If you plan to hold your mortgage for a longer period (usually 3.5 to 4 years or more), it’s better to pay some amount of discount points and earn your money back over the duration of the loan. If you believe you’ll hold the mortgage for a shorter period, save your money and take a higher/no-points rate for your relatively shorter duration financing instrument.   

Below is a chart of the 30-year fixed mortgage rate since 1971. 

And here’s the same chart zoomed in from 2008 to present:

You’ll note that the 30-year fixed dipped below 5% for the first time in modern history in 2009, about 16 years ago. Why? What magical economic lever was pulled to force rates lower and elevate homeownership affordability to new heights? 

My business partner would tell you it’s because the Steelers won the Super Bowl in 2009, the last game to feature famed commentator John Madden. Scholars still debate this coincidence.  

Truth be told, the reason mortgage rates dipped below the Mendoza Line of 5% is due to the actions of our very own Federal Reserve. In 2008, Bear Stearns and Lehman Brothers sat down to a banquet of consequences. But the larger catastrophe was still unfolding. U.S. Treasury Secretary Hank Paulson declared “we are going through a financial crisis more severe and unpredictable than any in our lifetime.” 

“Too big to fail” was upon us. 

By December 2008, Fed Chairman Ben Bernanke, a student of The Great Depression and fellow toboggan afficionado, had acted quickly with the Federal Reserve Board to cut the Fed Funds Rate to 0%-0.25%. Still, Bernanke knew this contagion required a stronger response than slashing short-term borrowing costs. Bernanke needed the long end of the yield curve to follow suit. How can one control the long end of the curve?

In January 2009, the Federal Reserve Bank of New York changed history forever by stepping off the sidelines and inserting themselves into the game as starting Quarterback of the Financial Crisis. The Fed was now a market participant, buying mortgage-backed securities for the very first time. As Madden would say, “don’t worry about the horse being blind; just load the wagon.”

The Fed declared intent to purchase $1.25 trillion in mortgage-backed securities (MBS), a move that should lower long-term interest rates, making borrowing cheaper to stimulate activity. They hoped the actions would also bring stability to the financial system by providing liquidity, the lifeblood of a modern economy. 

Spoiler alert.
It worked.
Whew.

Philosopher Francis Bacon wrote “sometimes the cure is worse than the disease.” In the case of too big to fail, I’ll take the cure. The disease would’ve crippled, crushed and cratered the United States economy. This was a “no-milk-on-the-shelves” moment, and I genuinely believe history will judge Bernanke kindly. But Francis’ words still resonate. Medicines leave side effects. 

The Fed’s actions were called “Quantitative Easing.” Leave it to economists to take something utterly historic and make it sound like a laxative. Quantitative Easing 1 (QE1) ended in spring of 2010. Before we could say our 2011 New Year’s resolutions, QE2 had begun. The Fed’s second round of stimulus included purchases of $600 billion in US Treasury securities. The program would continue until mid-2011. 

Like Brett Favre and retirement, sometimes we don’t know when to quit. In September 2012, the Fed committed to QE3, a $40 billion per month purchase program for mortgage-backed securities targeting support for the housing market. This round of quantitative easing would persist longer than the others, until October 2014. From then to the pandemic, the Fed continued to reinvest payments from its holdings into new MBS. Not quite a continuation of QE3 but no exodus either. Think of it like microdosing for the securities markets. Don’t steal that. It’s mine. I made it up. 

The Fed’s dovish public statement of intentions to keep interest rates low coupled nicely with their history of subbing themselves into the securities contest to lead another game-winning drive. Investors feared no evil. Fed to the rescue. As the 1973 song by The Spinners goes, “whenever you call me, I’ll be there.”

Below is that same chart reflecting the 30-year fixed since 2008, overlaid with the Fed’s purchase of MBS through the decade of the 2010’s (the red line). The sub-5% range happened for the very first time in 2009. The Mortgage Championship Dynasty of the 2010’s was made possible by the actions of our star Quarterback, the Federal Reserve. Folks, this wasn’t the rule, it was the exception. This version of the Fed for mortgage was akin to Tom Brady for the Patriots. The Patriots have no natural claim to dynasty outside of Tom Brady. And mortgage rates have no natural right to historic lows without their star QB, either. 

QE has been replaced by QT (quantitative tightening), an economists’ antidiarrheal. The Fed is no longer buying MBS and though inflation has been tamed, mortgage rates have remained between 6.25-7.25%. Tom Brady retired. The Patriots suck again. Dynasties end. Here begs the question, what is the Mortgage Rate Resting State? 

It’s been so long since the Fed began influencing the housing market, it’s tough to declare a defensible, modern-day answer to this question. But I can tell you for sure, it isn’t below 5%. 

Back to Sir Francis Bacon and his cautionary tale: Since the Fed came off the bench in 2009, they’ve been creating bubbles. And they still are. The ultra-low rates of the pandemic have frozen the resale home market. Hello, lock-in effect. Existing home sales will close 2024 at 1995 levels. We’ve stiff-armed an entire generation of Americans from homeownership. 

Today’s bubble is a demand bubble. First-time homebuyers now make up only 24% of all homebuyers, the lowest share since the NAR began tracking this data (43 years). They are subbing themselves out of the game. 

The average age of home sellers was 63 this year, the highest ever recorded.  The median age of a first-time homeowner has jumped to 38, up from 35 the same period a year ago. In the 1980s, the typical first-time buyer was in their late 20s. This bubble will have its own unique and dynamic effects for lenders to grapple with for the latter half of the 2020’s. 

For now, as mortgage professionals, we can do a disservice to our clients when we promote narratives with no factual basis. The solution to solving any problem starts with a willingness to drag it into the light. Concluding with one more Madden-ism: Coaches must watch for what they don’t want to see and listen to what they don’t want to hear. 

Advisor trumps salesman. Every time.

Mark Milam is the president and founder of Highland Mortgage.

This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.

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