Mortgage Rates Below 5 Percent?

All the experts say long-term interest rates are going up. They're supposed to get to six percent by the end of the year, according to several predictions. But interest rates didn't rise last week. Instead they fell again–for the third week in a row.

What's going on?

The average 30-year fixed-rate mortgage sank to 4.99 percent, according to Freddie Mac's Primary Mortgage Market Survey for the week ending January 21. That's down from 5.14 percent for the week ending December 31.
It seems that fixed mortgage rates have followed bond yields lower for three weeks running, and this has once again pushed 30-year mortgages below the five-percent mark, according to Frank Nothaft, Freddie Mac's chief economist.

This isn't unusual: Long-term rates tend to follow the annual yields of long-term bonds.

This is because banks and mortgage companies routinely bundle home loans and sell them as bonds. The annual interest rate they charge consumers usually equals the annual investment yield that bond investors demand plus a little extra for their own profit. (The exceptions are times of economic chaos like early 2009, when banks added more to interest rates to make up for their massive losses.)

For people thinking of refinancing or taking out a home loan, the easiest relevant bond yield to track is the yield of ten-year Treasury bonds. The yield on these Treasuries was 3.67 percent as of January 21. That's down from 3.84 percent on December 31, according to data from

Over the last three weeks, interest rates and Treasury bond yields both fell roughly 0.15 percent.

Chart from

Why did ten-year Treasury yields fall? Long-term bond yields tend to fall on economic uncertainty or bad news, because investors hedge their short-term economic bets with a few nice, safe, long-term bonds. Rates fell over the last three weeks as economists argued about whether the recovery would fizzle.

Freddie Mac economists still predict average interest rates for 30-year home loans will hit six percent by the end of the year. Just look at Treasury bond yields over the last five years. They're usually at least a percentage point higher than they are now. I'm willing to bet these low rates can't last forever.

Chart from
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