Past, Present, and Future Mortgage Loan Interest Rates

Over the past two years, the housing industry has experienced a significant change. The years leading up to 2011 were stark due to the then-recent housing crash. The subsequent years allowed for a slow, but steady strengthening.

Mortgage loan interest rates have declined since 2011 and continue to remain near record lows, which assist the housing industry on multiple levels.

But large changes do not happen overnight.

In the period since 2011, the 30-year rate alone has dropped from a high of 5.05 percent to a record low of 3.31 percent. This large change took over 21 months to occur.

The process took even longer for the 15-year rate. It peaked at 4.29 percent and took over 26 months to reach the current low of 2.61 percent.

In order to assess how the rates have fluctuated since 2011, loans.org used mortgage rate averages from Freddie Mac, compared them with outside data and spoke with several housing experts about the transition from a damaged post-bubble economy to a stronger housing industry.

Interest Rate Changes During 2011

The beginning of 2011 started with all four primary mortgage interest rates — 30-year fixed, 15-year fixed, 5-year adjustable, and 1-year adjustable — below 5 percent.

By February, the 30-year fixed-rate mortgage (FRM) interest rates had climbed to a high mark of 5.05 percent. Although over two years have passed, this high has not been surpassed.

Three out of the four interest rates dropped nearly a full percentage point throughout the year, as shown in the graph below.

The 30-year FRM started 2011 at 4.77 percent and dropped to 3.95 by Dec. 29, 2011. On Oct. 6, 2011, the 30-year rate dropped below 4 percent for the first time ever.

The 15-year FRM went from 4.13 percent to 3.24. The final major drop occurred to the 5-year FRM, as it fell from 3.75 percent to 2.88.

Despite large drops in the mortgage interest rates for the major types of mortgages, 2011 was a difficult year for the housing industry, according to Len Kiefer, Freddie Mac’s deputy chief economist. Housing stabilized, but the amount of activity in the market was significantly below normal levels.

Kiefer said home sales in 2011 were just over 4.5 million units, whereas pre-bubble, five to six million units were sold annually. According to the Freddie Mac House Price Index, house prices on a national scale fell 3.7 percent.

Delinquent rates remained high as well throughout the year.

During the summer of 2011, most markets experienced a bottom, according to Dyer Mortgage Group’s Division President Bobbie Dyer.

“During that summer, we started seeing multiple offers on properties which we had not seen in several years, decreased availability of housing inventory, and consumer perceptions of the market had a noticeable change,” Dyer said.

Interest Rate Changes During 2012

The year 2012 provided the housing industry an opportunity to recover. Mortgage interest rates continued to drop as show by the graph below.

The 30-year FRM started at 3.91 percent and dropped to 3.35 percent. The 15-year FRM also experienced a significant decrease from 3.23 percent to 2.65 percent.

The 5-year ARM barely changed during 2012. The rate started the year at 2.86 percent, slowly fluctuated up and down, and ended at 2.7 percent.

In addition, on Nov. 21, 2012, the 30-year FRM rate hit a historic low that has remained unsurpassed. It ranked at a low of 3.31 percent. Although mortgage interest rates in April 2013 have steadily crept near the 2012 historic rate, the record low has not been broken.

Several factors impacted the rate decline in 2012.

Kiefer said housing turned a corner in 2012. Home sales increased by 10 percent, strengthened by an increasing construction market, which was up 28 percent.

House prices increased by 6.4 percent. This was the first annual increase, on a national scale, since 2006.  Additionally, delinquency rates started to decline.

Dyer said as inventory went down, confidence went up. When interest rates declined in the third and fourth quarter, she said the “market began to turn with the bottom of prices being in the rearview mirror.”

This increase in confidence continued steadily. Interest rates remained below 3.4 for the remainder of 2012.

Interest Rate Changes During 2013

At the end of 2012, Freddie Mac made several predictions for the upcoming year. Although the rates made a downturn back towards record lows, they have remained at the lows predicted. In addition, home values, and the housing market in general, have improved.

Kiefer said 2013 is expected to be the best year for housing since 2007.

During the first four months of 2013, mortgage loan interest rates have not changed vastly from their original standings. Although the rates averaged higher in February and March, the rates lowered in April.

The 30-year FRM averaged 3.4 percent on April 25, 2013, only 0.9 percent points away from the record low set in late 2012.

The 15-year FRM set a record low on the same week in April and bottomed out at 2.61 percent.

Despite stable and low rates, the housing market still has a long path to travel.

“Though housing markets have improved substantially over the last year and a half, there is still a long way to go before housing would be considered healthy,” Kiefer said.

Overall Trends

On a larger scale, the interest rates for the past 2.5 years can be assessed for overarching patterns. Significant drops in a year’s time, such as the 2011 drop in the 30-year FRM rate, impact more than just consumer allure to purchase a new home.

Rates impacted the overall housing and construction market in several ways.

Peter Grabel, senior mortgage loan originator for Luxury Mortgage Corp, said the current housing market is a “perfect storm of low prices and low rates.”

Consumers are more confident now, and instead of paying higher rental prices, they are accepting the idea of homeownership. Grabel said several years ago, consumers were fearful of how low the economy could drop, but now he said they believe it can only go up, even if just a little.

“People feel like the bleeding has stopped,” he said.

Grabel said the biggest surprise from the past few years is how low the interest rates have remained. If people were asked how rates would have changed, most consumers would have expected a larger increase. As the following chart shows, rates have declined since 2011 and have not experienced a large increase, which is especially evident in the recent decline seen in March and April 2013.

Grabel expects rates to start going up. He said they are likely not going to lower past the record lows set in 2012.

“Unless banks are willing to lend with a smaller [profit] margin, it is mathematically impossible to have banks lower interest rates,” he said.

The current federal fund rate, the rate at which banks lend to one another overnight, is currently at 0.14 percent. Since the rate changes daily, the Federal Reserve sets a target range, which is currently between zero and 0.25 percent.

This low rate does not leave enough room for consumer interest rates on mortgage loans, auto loans, and other consumer credit to lower. If banks only make 0.14 percent on loans between one another, there is a very small margin on profit.

Since interest rates are near historic lows, Grabel said there is very little space for them to lower. Instead, they should increase.

To apply for a loan at today’s rate, click here.

The Significance of Mortgage Rates

Dyer said mortgage rates continue to retain their importance, when compared with other housing variables, due to affordability.

“The amount of mortgage a consumer will qualify for based on rates at 3.5 percent is much different than if rates are 5 percent,” she said. “Mortgage interest rates are a huge factor when it comes to the variables of the housing market.”

When rates are high, consumers might be forced to choose between a new home and a new car. When borrowers pay less each month in interest, they are either able to tackle higher payments or additional consumer commodities.

Despite their impact, most consumers do not need to watch rates on a weekly basis.

Dyer doesn’t believe there is a benefit for borrowers to assess past rates, only current. Reviewing past changes will not influence their decision today, which is impacted by the borrower’s economic situation.

Grabel agrees. He said that closing a deal on a new home is based on a borrower’s current life status, such as when a new job is obtained or when a new school for the kids is desired, and not on the weekly rates.

“I don’t think anyone says ‘rates are down a quarter, let’s buy a home now,’” he said.

But for the industry’s sake, there is a reason to watch the rates, Dyer said.

“We do watch year-over-year rates as this information is helpful when following a business plan for meeting the needs of our clients and consumers in general,” she said.

Predicting the Future

Economists across the country try to predict the housing market, including mortgage interest rates. Some months, the predictions are accurate, other months provide large shakeups.

But even for real estate professionals that use the rates on a weekly basis, their belief in predictions is always cautious.

“There are so many factors when determining interest rates that it is not easy to determine who is right and who is wrong,” Dyer said.

Grabel agrees and said the rates move too minimally for his constant attention. Unlike the stock markets, he reviews the rates enough to remain knowledgeable, but not daily.

“I actually don’t watch them under a microscope anymore because they’re really not volatile,” he said.