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Old 02-17-2009, 10:51 AM
 
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We're considering buying a home, but I sincerely believe prices have at least 15% more to drop in our area before they level out. On the other hand, if mortgage rates go up, that will make money more expensive to borrow 1-3 years from now after prices drop.

People keep saying rates are historically low right now, but I did some digging on the house we're looking at and saw it had a 5% loan in 1957. So I did a little more digging and found this chart that shows that prior to 1965 or so, rates were typically under 6%.

InnoVest's Foreclosure Forum

Soooooo.....I'm wondering. Why were rates so low during the depression? Why were they so low in the 50's?

Just trying to make an educated guess on where rates might be headed in 3-5 years.

Any scenarios based on known facts/history are welcome. (I know this is a big crystal ball gaze.)
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Old 02-17-2009, 11:16 AM
 
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My initial guess would be that rates were lower then because there were fewer defaults (I could look up the numbers, but I don't have the time). Mortgages were generally considered fairly safe investments because they were backed by a substantial asset - the home. Investors seeking safe harbors ordinarily would seek government bonds (gov debt) because the chance the gov goes bankrupt are about as small as it gets. Thus, mortgage rates were typically set by adding a risk premium to the rate on government bonds - because they were pretty safe, but not quite as safe as bonds and thus the investor should earn a little more for taking the additional risk (which was minimal).

Now, once upon a time, you had to have 20% down or you couldn't get a loan at all. That's pretty big incentive not to default and because it is a significant obstacle to buying a home it kept home prices down and more affordable. The effect is compound: 1) people could more easily afford their home because the home costed less resulting in fewer defaults, and 2) 20% equity in your home is a large incentive to avoid defaulting for fear of losing that money outright.

In all honesty this is the way things should be. Saving 20% for a downpayment proves to the bank you can afford the payment, and it invests you in your home. Ironically, the major benefactors of low down payment and no downpayment programs are in fact the banks, homebuilders and realtors. They drive up the price of homes, resulting in greater fees, commissions and margins - and suck more money in interest out of the borrow over the life of the loan.

People just want to own a home (irrationally in many cases). The banking industry has actually made that more difficult under the guise of making it easier (easy credit driving home prices upward) on top of pure greed. The risk on modern mortgages is MUCH higher than those many years ago - and thus the tendency toward higher rates.
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Old 02-17-2009, 01:32 PM
 
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20% down was not always the norm -- when the income / purchase multiplier was lower it was not uncommon for lenders to expect even larger (percentage wise) down payments.

The relationship between interest rates on mortgages and those on government bonds, passbook savings and dividend returns on blue chip stocks are quite interesting to look at historically.

It is not that one is "set by" the other, but that investors will ALWAYS consider the risk/reward potential of each when they decide where to "put their money".

S&P Earnings History
Bespoke Investment Group: Historical Dividend Yield of the S&P 500: 1925-Present
Bespoke Investment Group: Historical Dividend Yield of the S&P 500


U.S. Treasury - Daily Treasury Yield Curve

To get a big picture sense of what drives these things you have to dig into what goes into the setting of "benchmark" rates:

What Interest Rate Spreads Can Tell Us about Mortgage Markets :: By Andrea Pescatori and Beth Mowry :: Economic Trends :: 04.30.08 :: Federal Reserve Bank of Cleveland

Historical Yield Curve


People can get paid a lot to make sense of this, and like weathermen, if they do a nice enough job they don't have to be right very often to keep getting paid...
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