The combination of record-low mortgage interest rates and low real estate prices created perfect conditions for investing in rental properties, and thousands of U.S. real estate investors took advantage of them. Unfortunately, all good things must come to an end and it seems the end of the ultra-low mortgage rate era is closer than we thought. Rates are already on the rise and are set to continue to increase.
In early June, the average fixed rate 30-year mortgage increased another 10 basis points to 3.91%. This is a dramatic increase from the 3.31% at the beginning of May of this year. In the meantime, those shopping around for a 15 year mortgage are receiving rates around 3.03%; a significant increase from the all-time low of 2.56%. According to CNN Money, the time to take advantage of the low mortgage rates has already passed.
Americans have enjoyed such low mortgage rates due to the Federal Reserve artificially holding interest rates down, by purchasing up to $85 billion in mortgage-backed securities and Treasury bonds each month. This influx of capital to banks has boosted the supply of money available for lending, and with higher supply comes lower prices. Thus banks have charged lower interest rates for mortgage loans (and other loans, such as small business loans), given the large supply of money available on the market for lending and borrowing.
The recovering economy will allow the Fed to let interest rates to rise. During the recession, interest rates were lowered to help stimulate lending and growth in the economy, but as the economy continues to improve it creates a tailwind for more private investment. If the Fed believes that private investors will pick up the slack, it can stop artificially pumping money into the market by buying securities. So as the job market and the general economy improve, positive employment reports and other economic signals will let the Fed know it can ease off the support, which will drive rates upward.
The fact is that 3.3% mortgage interest rates are an anomaly. According to Keith Gumbinger, vice president of HSH.com, “The 30-year [mortgage rate] hit a 37-year low in 2003 at 5.23%, that was the previous low-watermark prior to this financial crisis and it’s likely we will move closer to that mark as we grind forward.” As we return to better financial conditions, higher interest rates will follow close behind.
But all is not lost for homebuyers and rental investors looking for cheap mortgages. Even as mortgage interest rates increase by one or two points, they will still be considerably lower than they have been in the past. Historically, the average mortgage interest rate has been around 5.5% or higher. Based on the going rates of Treasury bonds, mortgage interest rates (which are usually 1.7 to 2.1 percentage points higher than Treasury bond rates), the mortgage interest rate will soon be between 3.8% and 4.2%.