Delta's Silver Lining? Mortgage Rates Stay Low

Rates were expected to rise as the economy recovered, but they’ve barely budged

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There’s nothing good about the delta variant of the coronavirus, but the resurgence of the pandemic does have a silver lining for homebuyers—it’s kept mortgage rates near rock bottom.

Earlier in the year, as the economy reopened, economists expected mortgage rates to keep rising from the record lows they hit this winter. Instead, they headed back down and then stayed there. The average rate offered for a 30-year loan this week was 2.86%, a hair’s breadth below the 2.88% logged in July and not very far off from January’s record low of 2.65%, according to Freddie Mac’s measure.

So what changed? Mortgage rates are closely tied to yields on Treasury bonds, which are in turn heavily influenced by investor concerns about inflation and economic growth. Earlier in the year, concerns about spiking inflation rates and an overheating economy pushed yields higher, but then the emergence of the more contagious delta variant of COVID-19 sent daily case counts soaring again, and triggered the opposite of overheating concerns: increasingly pessimistic economic forecasts.

“The surprise in the world economy was the delta variant,” said Len Kiefer, deputy chief economist for Freddie Mac. “That led to some of the reopenings being delayed and lowered the growth outlook a little bit, and that then translates into lower long-term interest rates, which means mortgage rates stay low.”  

Low rates mean borrowing to buy a house is more affordable than it otherwise would be, which is a good thing given that sale prices have continued to balloon amid a shortage of houses on the market.  The supply problem has improved lately, but inventory is still far below normal.

Taking a longer view, the size of the average mortgage has grown by more than $90,000 since 2018, according to data from the Mortgage Bankers Association. But thanks to interest rates being almost 2 percentage points lower, homeowners would only pay about $82 more a month for the bigger loan, rather than $494 more if rates had stayed the same.

“That drop in interest rates over the last few years almost completely makes up for this extremely rapid housing price growth,” Kiefer said. “That’s a huge benefit.”

Looking ahead, Kiefer still expects rates to rise by the end of the year, but only by about 0.25 percentage point.

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