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Why Interest Rates Should Be 3.4%

  • February 22, 2012

by UrbanTurf Staff


This morning, The Wall Street Journal had an intriguing article as to why long-term mortgage rates should be even lower than their already-historic lows.

The piece points to the fact that the gap between what borrowers pay for mortgages and the rate that investors pay for bonds backed by home loans is getting wider. On Tuesday, it was 0.96 percent; historically it has hovered around .5 percent.

The Wall Street Journal unfortunately does not get into the financial nitty gritty of what the gap means, but it did offer this:

To be sure, consumers are seeing the lowest rates in several generations already. If history is any guide, it should be a lot lower. With yields on mortgage-backed securities at these levels, the 30-year fixed rate mortgages would be roughly 3.40% if the spread was around its historical average of 0.50 percentage points.

So, why aren’t rates even lower? A couple of reasons provided were that fewer banks are doing the majority of lending these days, so they don’t need to offer “rock bottom prices” and the increased regulations and risks associated with the mortgage market.

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