Discussing 2021 mortgage rates while relaxing in a nice home

The Arizona real estate market is currently experiencing historically low home mortgage rates. Over the last fifty years, the average on a Freddie Mac 30-year fixed-rate mortgage has been 7.76%. Today in Phoenix Arizona, that rate is 2.81%. Flocks of Surprise AZ homebuyers have been taking advantage of these remarkably low rates over the last twelve months. However, there’s no guarantee rates in Arizona will remain this low much longer.

Whenever the financial experts try to forecast mortgage rates, we should consider the advice of Mark Fleming, Chief Economist at First American:

  • “You know, the fallacy of economic forecasting is don't ever try and forecast interest rates and/or, more specifically, if you're a real estate economist mortgage rates, because you will always invariably be wrong.”

Many things impact Phoenix Arizona mortgage rates. The economy, inflation, and Fed policy, just to name a few. That makes forecasting rates difficult. However, there’s one metric that has held up over the last fifty years – the relationship between Arizona home mortgage rates and the 10-year treasury rate. Here’s a graph detailing this relationship since Freddie Mac started keeping mortgage rate records in 1972:

Chart of 30 year mortgage rate vs 10 year treasury rate showing that th rates followed each other for almost 50 years.

There’s no denying the close relationship between the two. Over the last five decades, there’s been an average 1.7-point spread between these two rates. It’s this long-term relationship that has some forecasters projecting an increase in mortgage rates as we move throughout the year. This is based on the recent surge in the 10-year treasury rate shown here:

 

Chart of the 10 year treasury rate moving up from October 2020 to today 2/23/21 from .68 up to 1.29. The recent surge is giving argument to the financial experts that Interest rates are poised to go up.

The spread between the two is now 1.53, indicating mortgage rates could rise. Actually, a bump-up in rate has already begun. As Joel Kan, Associate VP of Economic Forecasting for the Mortgage Bankers Association, reveals:

  • “Expectations of faster economic growth and inflation continue to push Treasury yields & mortgage rates higher. Since hitting a survey low in December, the 30-year fixed rate has slowly risen, & last week climbed to its highest level since Nov 2020.”

How high might they go in 2021?

No one knows for sure. Sam Khater, Chief Economist for Freddie Mac, recently suggested:

  • “While there are multiple temporary factors driving up rates, the underlying economic fundamentals point to rates remaining in the low 3% range for the year.”

What does this mean for Arizona Home Buyers?

Whether you’re a first-time buyer or you’ve purchased an Arizona home before, even an increase of half a point in mortgage rate (2.81 to 3.31%) makes a big difference. On a $300,000 mortgage, that difference (including principal and interest) is $82 a month, $984 a year, or a total of $29,520 over the life of the home loan.

Bottom Line

Based on the 50-year symbiotic relationship between treasury rates and mortgage rates, it appears mortgage rates could be headed up this year. It may make sense to buy now rather than wait.