How low can rates go during this Presidential Election Cycle?
Not much, if at all, according to historical trends and economic theory. Rates are about as low as they can get. However, time is not on our side so now is the perfect opportunity to buy or refinance! Read on to find out why...
After inauguration of a new president, rates always change. Sometimes for the better and sometimes for the worse but unfortunately for this election cycle they cannot technically go down much lower than they are now so they only have one possible direction this election and that is to go up. There is more information about this later in the article.
Historical rate information from Freddie Mac over the last 44 years (11 election cycles) shows that during an election year and shortly thereafter, mortgage rates tend to stay steady or decrease slightly and here are some reasons why...
- The incumbent President and his party are reluctant to do anything before an election that would stir the economy and cause a negative impact on the party's campaigns or give the other party any fuel.
- The opposing party (especially if they control congress and/or the senate) are also reluctant to cause a stir for the very same reasons. This tactic reaches far beyond just Mortgage Rates and affects the entire economy. The economy simply tends to "slow down" during an election year and promises of a "better tomorrow" during election time tend to make the economy move slowly and usually in a positive direction.
- If the incumbent president wins re-election, the economy (and mortgage rates) tend to remain on their current course. Same president, administration and policies so therefore the same directions for the country including the economy and mortgage rates.
- If a new president of the same party wins, the trend is similar because the same party is at the helm.
Even in this year's somewhat tumultuous election cycle, these behaviors still hold true. Neither party has (purposely) done anything to impact the economy. As crazy as everything has been, the economy has remained fairly "normal" for an election cycle year. It is when a new president from the opposing party wins that the changes to rates are more drastic. However, this year cannot yield lower rates regardless of what happens. Rates can only remain steady or go up so take advantage now before this election cycle is over and rates possibly change for the worse.
Why rates cannot go down much lower...
The current 30 year fixed par rate of 3.816% is above the 3.25% theoretical bottom that a 30 year mortgage cannot go below. There is no real "bottom" but the way the mortgage market and mortgage backed securities work, it is theoretically improbable for the par rate to go below 3.25% on a 30 year fixed loan without paying points to buy it down. This theoretical bottom is evidenced by the fact that at the height of the recession while prime was near 0%, the lowest 30 year fixed rates were in 2012 through 2013. The 30 year fixed par rate hovered between 3.31% and 3.49% for 24 months! If it could have gone lower than 3.25% we would have surely seen it at that time.
The Federal Funds Rate (which indirectly affects mortgage rates) was at 0.25% from December 2008 to December 2015. No, that is not a typo! The Federal Funds Rate is the rate at which banks lend money to each other. The prime rate your bank offers you has a 3% margin added to the Federal Funds Rate. That is why during that same period your bank offered a prime rate of 3.25% to its "most favored customers". Please do not confuse the Prime Rate with Mortgage Rates. Although they tend to move together, they are not directly related in any way. Prime Rate is short term and variable and the funds are supplied by the Federal Reserve to your bank and always has a 3.00% margin. Mortgages are long term and most of the time are fixed and the funds are supplied by private investors in the form of mortgage backed securities. Even the variable mortgages that are available are not normally based on Prime.
The only home loans based on Prime is a Home Equity Line of Credit (HELOC) and the rates on these can change monthly as they go up and down with the prime rate. These are essentially a large credit card that is secured by your home.
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