Lately, many people have argued that we will not return to lower mortgage rates.
That it is impossible to return to a low mortgage interest rate.
The thing is, when they say that, they always think of a mortgage rate of 3%, maybe 4%.
In reality, mortgage rates could drop quite a bit from current levels and still be quite a bit higher than they used to be.
Simply put, they can go lower without being considered ‘low’ again.
Remember when a 4.5% mortgage rate sounded super high?
A few years ago, a friend of mine bought a house and took out an adjustable rate mortgage (ARM).
At the time, he got a rate of 4.5%, which sounded super steep at the time. Not the least bit attractive.
And again, it was an ARM, so it’s not like it was a slightly more expensive 30 year repair. It was both more expensive than what everyone was used to and not repaired for more than five years.
At the time, 4.5% sounded super high. Why? Because we were used to rates in twos and threes.
Months before he locked in his rate, you could still get a 30-year rate of 3.25%.
So it is always relative to what you are used to. And he and everyone else was used to seeing rates that started with a 2 or a 3.
I wrote a while ago that once we saw higher rates, our brains would think that a rate of 5% or 6% would actually seem pretty decent.
And now, in retrospect, that couldn’t be more true.
What does a 5% mortgage interest rate look like today?
If you offered someone a 5% mortgage rate today, they’d probably say it looks damn good.
This is simply because lately they are seeing rates starting with seven or eight.
So why wouldn’t it look good to see something that starts with five? Maybe even a six at this point.
This is the exact opposite of what happened when we went from 2% and 3% mortgage rates to 6%.
This is the silver lining that is currently working in mortgage rates’ favor.
Human psychology has a way of making things not seem so bad once you’ve been through much worse.
A year ago, the 30-year yield reached a near 21st-century high of 8%. Then interest rates rose and fell to around 6% in September.
For the record, that high was 8.64% the week of May 19, 2000, according to Freddie Mac, and we’ve never gotten that close (peaking at 7.79% at the end of October 2023).
They have since returned to 7%, likely because Trump won a second term as president and many expected higher inflation under his watch.
Where they go from here is another question, one I’ve already touched on.
What I mean when I say: mortgage interest rates could be lower
Now back to the ‘lower’ question.
Now when I talk about mortgage rates, I’m using recent levels. While that sounds obvious, it often seems to be lost on people.
So when I say that interest rates can drop again, or go lower from now on, that doesn’t mean back to 2% or 3%.
It simply means that they can go back from, say, 6% or down to 5%.
The idea here is that it’s not a crazy return to what now feels like unsustainably low interest rates.
It’s just a return to something in between. And when you think about it, something in between seems pretty reasonable.
A bit like Goldilocks. Not too high, not too low. Maybe just right!
Not too high to make housing unaffordable and inaccessible to everyone.
But not so low that demand picks up again and house prices rise.
Admittedly, there is no strong correlation between house prices and mortgage interest rates anyway.
But that’s been the story lately, given low interest rates. Remember, they could coincide if the economy weakens and fewer buyers are willing or able to purchase homes.
Of course, it’s not really up to us to decide where rates go, nor is it up to the Fed. The direction of mortgage rates will be based on the relative strength or weakness of the economy.
The size of government spending in coming years could also play a role, as increased bond issuance could lead to lower bond prices, meaning higher interest rates would have to compensate.
Let’s hope that interest rates find a sweet spot that leads to a better balance in the housing market, where buyers and sellers can transact in a healthy manner again.
Read more: How to track mortgage rates.
Before creating this site, I worked as an account manager for a mortgage company in Los Angeles. My real-world experience in the early 2000s inspired me to start writing about mortgages 18 years ago to help potential (and existing) homebuyers better navigate the mortgage process. Follow me on Twitter for fun shots.
