I have already blogged here once about the current hysterical herd, that seems to think that rates are dropping 1% each week. Apparently…I again need to discuss why rates are not plummeting non-stop, and likely…..will have to do so again.
The chart I show above pretty much speaks for itself. It tracks the 10 year treasury bond (this is NOT a chart of mortgage rates!) going back to the year 1790, which is 220 years. That is a very long history to consider, and is a good basis with which to draw a conclusion. Mortgage rates do not track the 10 year treasury bond step for step, but the 10 year treasury bond is one of the best gauges to tell you where interest rates have been and where they’re going. Currently the 10 year treasury bond is 2.61%. If you take a close look at the chart, there are only two other times in history when the 10 year treasury bond has been as low as it has now. And one of them is NOT the 1930s during the Great Depression!
It is astonishing that the 10 year treasury bond was not lower in the Great Depression of the 1930s than it is now. It is also astonishing that in 22 decades of history there were only 2 other decades that the 10 year treasury bond was this low. And within those 22 decades, all of the 1940s was at this level or lower, and only a very few years in the 1950s.
So the media has the story wrong, somewhat. Instead of saying that rates are at their lowest point in 50-60 years, they should say that rates are at their lowest point in 220 years, barring a very few periods of time! That is a much more accurate portrayal of what is going on with interest rate. When you think of the macro picture, it gives you a much more clear idea of where rates may or may not go from there.
If this graph does not speak volumes, I do not know what will. If interest rates are set to go lower from here, which everybody seems to think, then we are in for the mother of all depressions. I am talking about the big one. I am talking about an unprecedented economic event that nobody has ever seen nor dreamed of. As much as I think the macro economic situation in this country is a mess, I do not think we are headed for the Dark Ages.
I have potential refinance clients who have 6% interest rates, who I can offer a 30 year fixed rate at 4.375% with 0 points, and they think rates are going lower and want to hold out for more! I am so astonished when I speak to them that I’m speechless, and for anybody that knows me, they know that I am not often speechless. How someone can hold out for a few more ticks downward when we are at a historical low that has been seen very few times in history, I have no idea.
I think the problem is that human beings are very linear thinkers. When we saw the DOW break above 14,000, there were books and articles calling for DOW 30,000. When the stock market was declining and the DOW was headed toward 6,000 points, everybody thought the world was coming to an end, and was wondering if we’d hit 3,000-4,000 on the DOW (come on, you know you were thinking about it), and then we saw a 60% rally in stock prices! When Japan was kicking our tails economically in the 1980s, I read books about the predicted world dominance by Japan. This was right before Japan went on a two decade deflationary spiral. I could go on but I think I have made my point.
Interest rates have come down a long way, and they’re bumping around the historical basement of interest rate history. For those of you that think interest rates will head to 2% or 3%, I think you need to take a hard look at this chart. For those of you that do your homework and already know this data and are not linear thinkers, I wish there were more of you in the world. My guess…rates don’t get much lower, if at all, but they also do not spike. I am betting that we see rates at this level, or as much as .5% to .75% higher, for the next 5 years or more. And that is OK with me, because those are all very low rates!