Last week, the government announced that the unemployment rate had grown to 6.5%. That is the highest rate since March of 1994.
In March of 1994, the average conventional mortgage rate was 7.80%. That rate was 1.32% above the 10 year Treasury rate. The Dow Jones was trading at about 4000. The seasonally adjusted gross domestic product (GDP) was about $7,030 billion. The national debt was about 65% of gross domestic product. Existing home sales in March of 1994 were 4.06 million.
Last week, the average conventional mortgage rate was 6.20%. That rate was 2.45% above the 10 year Treasury rate. The Dow Jones closed at 8943. The seasonally adjusted GDP was about $14,429 billion. The national debt is at about 69% of GDP, and at its highest rate since 1955. And that does not count the implied debt assumed in the Fannie/Freddie nationalization. Existing home sales in September, 2008 were 5.18 million.
What might all of this mean?
Continued expansion of the national debt will keep upward pressure on U.S. Treasury rates and mortgage rates. The spread between mortgage and treasury rates has some room to contract, which could soften any upward rate pressure. However, the nationalization of Fannie Mae and Freddie Mac, and direct government investment in our nation’s financial institutions, has created untested conditions for the spread between mortgages and treasuries. Due to the implicit government support, one would think that both actions would cause mortgages rates to trade closer to treasuries. So far there has been some compression, but the spreads are still in a historically high range.
The combination of relatively low interest rates and softening home prices has produced an attractive buyers market, and a housing affordability index that is hovering at three year highs. The rate of increase in housing inventory shows signs of stabilizing at near normal levels.
Americans are still buying homes. If you need and can afford a home, it is a very good time to consider the current market conditions.
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