Is China Keeping U.S. Mortgage Rates at Historic Lows?

In December 2015, the Federal Reserve raised the target range for the federal funds rate for the first time in almost a decade. At the time, there was much discussion regarding the impact this move would have on the still burgeoning housing recovery, specifically through higher mortgage rates and an increased cost of borrowing. Initially, it appeared as though mortgage rates would follow the federal funds rate higher. As seen in the figure below, the average contract rate reported by Freddie Mac for a 30-year-fixed-rate mortgage rose from 3.95 percent during the week ending December 10, 2015, the week prior to the announcement by the Federal Reserve, to a five-month high of 4.01 percent in the week ending December 31, 2015. While a six basis point move in the average contract rate over a three-week period is in no way a historically large gain, it did continue the upward trend observed in the weeks prior to the December Federal Open Committee meeting as lenders baked the widely expected rate hike.

"As long as U.S. Treasuries remain an attractive investment option, historically low mortgage rates will continue to support the recovering housing market."

However, it is important to remember that interest rates on mortgages are more closely tied to the yield on the 10-year Treasury, which dropped 19 basis points in the first 15 days of January 2016 (see figure below). This was due in part to a search for safety by investors as they moved into the bond market, driving down yields. This investor reaction to concerns over a slumping energy market and recent global economic uncertainty, particularly in regards to the economic slowdown in China, has also triggered stock market declines of almost 10 percent during the beginning of the New Year. The movement in the 10-year Treasury was mirrored by the average 30-year-fixed contract rate, which fell 20 basis points in the first 21 days of January to 3.81 percent, a three-month low. As long as U.S. Treasuries remain an attractive investment option, historically low mortgage rates will continue to support the recovering housing market.

Figure 1