Waiting for Mortgage Rates to Fall? Don't Hold Your Breath.

I bought an apartment last year and if I were buying today, I wouldn't be able to afford it. The increase in mortgage rates would mean $1,000 more a month than I am paying now. It may be the only time in my life I (inadvertently) timed the market right.

Now, my friends who want to buy are waiting and hoping for those heady 2.7% 30-year fixed mortgage rate days to return. Some are betting they will and taking out an adjustable rate mortgage. But rates may never go back down, at least not that low. Rates might even go higher; we may come to pine for the days of a 5% mortgage rate. For most of the 1980s mortgage rates were more than 10%.

The low rates of the last few years were an anomaly, a combination of freakishly low interest rates and Federal Reserve intervention in the bond and mortgage-backed security market. Now the Fed has ended quantitative easing and is raising rates. But what really matters is what happens to the 10-year bond yield, because that determines mortgage rates. And like mortgage rates, the 10-year bond yield has been rising recently, hovering just under 3% at last count. But this yield is also still low, by historical standards.

Until very recently, many financial macro economists would put their money (if they made active market bets—which they don’t) on the 10-year rising. The finance literature assumed bond prices mean-revert, or they may bounce around for a few (or several) years, but over the long term they'll revert to a historic average that reflects how much people want to save versus spend — with the idea that the desire to save should be fairly stable over time. Also, unlike stocks, bond prices can’t keep going up, otherwise we would end up with very negative yields; few investors would accept a -10% yield. So ever since the 1990s, the mean-reverting faithful have been waiting for the 10-year bond yield to return to its historic average of about 6% to 7%.