Since the Federal Reserve cut interest rates to 0% to ease the crisis sparked by COVID-19, the U.S. could see mortgage rates hit record lows.
But multiple factors will prevent mortgage rates from falling to zero.
The Fed announced late Sunday that it was cutting its benchmark federal funds rate by 1% to a range of 0% to 0.25%, alongside other measures meant to stimulate the nation’s economy as it takes a major hit from the coronavirus pandemic. While economists cheered the move, it caused apprehension among investors, with the Dow Jones Industrial Average DJIA, 4.570% , the S&P 500 index SPX, 5.496% and the Nasdaq COMP, 5.890% all dropping upwards of 8% in trading Monday.
In and of itself, the Fed’s rate cut won’t cause mortgage rates to fall. Because mortgages are long-term loans, their interests rates tend to track long-term bond yields rather than short-term interest rates such as the federal funds rate. The yields on the 10-year Treasury note TMUBMUSD10Y, 1.025% and the 30-year Treasury note TMUBMUSD30Y, 1.612% both fell in reaction to the stock market declines as investors fled for these government bonds, which are see as safe havens.
The ongoing turmoil caused by the COVID-19 outbreak, which had sickened nearly 175,000 people and caused 6,705 deaths as of Monday, has sent mortgage rates lower, to be sure. Nearly two weeks ago, mortgage rates hit a record low on average, according to Freddie Mac.
In the week after that though, interest rates on home loans rebounded slightly as lenders moved rates up to deal with a major influx of refinance applications and to hedge for the potential that bond yields could rise were the coronavirus situation to improve.