The coronavirus has caused panic in the global economic markets. Mortgage rates are at the lowest they’ve been in four years because of the coronavirus scare.
On March 3rd, the Federal Reserve slashed its interest rate by 0.5 points. Now the federal interest rate is between 1% and 1.25%. The coronavirus outbreak and its risks are the main reasons for the reduced federal interest rate, according to the central bank.
The federal interest rate and mortgage rates are synchronized with each other. Mortgage rates are affected by forces within the market. The federal interest rate reduction is actually responding to mortgage rate reductions, which is unusual.
Long-term bond rates cause fluctuations in mortgage rates all the time. The Federal Reserve makes short-term interest rate adjustments based on mortgage rate changes. The rate of the 10-year Treasury note has been falling substantially over the last few weeks. This has caused many investors to stop investing in the treasury.
Normally, a decrease in the 10-year Treasury rate would cause mortgage rates to decrease too. After all, mortgage rates traditionally respond to the direction of the 10-year Treasury note. But we see mortgage rates that have not dropped as low as they might. Lenders and financial institutions are holding back from letting mortgage rates drop further.
As of now, a lot of refinancing is happening because of the lowered mortgage rates spurred by the coronavirus. There’s even a high demand for homes. The problem is that many homeowners are not selling their homes, which means there’s a short supply of homes for sale on the market.
So, why would lenders lower mortgage rates? If the volume of new mortgage applications is low and you have more homeowners refinancing their current mortgages, lowering mortgage rates is not a good idea. Lenders may be better off locking in low interest rates for customers looking to refinance.
There has been talk of a recession for about a year now. The coronavirus situation is will boost the likelihood of a recession. We’ve already seen the Dow Jones drop by about 2,000 points, a new record for the biggest single-day drop.
Investors are in full panic mode, and unless they get some kind of reassurance from the federal government that everything will be okay, expect interest rates to continue being cut. If the Federal Reserve lowers the federal interest rate to 0%, we could very well see a recession hit the United States again.
President Donald Trump and members of his administration claim the coronavirus will subside over the next couple of months as the weather gets warmer. If this turns out to be true, it could save the country and the world from another recession. If the virus doesn’t fade away, a recession is likely to follow.