Current Market Review: Winter 2006
Fixed interest rates have remained basically flat for the last 3 to 4 years. Variable rates are presently approaching the same level as fixed rates following a steady tightening cycle by the Federal Reserve. Most experts in the financial community expect that the Fed is nearly done with its campaign to steadily raise short term (variable) interest rates. We think probability favors a scenario for the next few years in which both fixed and variable rates remain flat and contained within a range of 6% to 7%.
Chart: Variable Mortgage Rates vs. Fixed Mortgage Rates 10 Year History
The chart above illustrates the history of mortgage interest rates over the last
10 years. It's important to distinguish between fixed rates on the one hand, which
are determined by market forces of supply and demand, and variable rates on the
other hand, which are primarily influenced by changes made as a matter of policy
by the Federal Reserve. As a general matter, when you hear on the news that the
Federal Reserve raised interest rates, it does not mean that fixed mortgage interest
rates moved higher. In fact, the opposite can sometimes occur. When the Fed raises
or lowers rates, it is variable rate loans that are affected, including equity
lines that are tied to the Prime Rate.
As you can see, 30-year fixed rates (represented by the orange line) have basically trended downward during the last decade. Fixed rates have come up somewhat since the low set in the summer of 2003, but contrary to many people's expectations, fixed rates remain below their 10-year average. Variable rates (represented by the blue line) have been lower than 30-year fixed rates on average for the last 10 years. Since early 2004, variable rates have risen steadily due to a strengthening general economy and some hints of rising inflation.
Both data sets assume a 1st mortgage loan for a borrower with good credit. The fixed rate line represents a jumbo 30-year fixed loan @ zero points. The variable rate line represents an average margin of 2.65% over the 12-MTA index.
Chart: U.S. 10-Year Treasury Note Yield
The chart above provides a broader view for the history of fixed rates since 1962. Fixed mortgage rates move in concert with the yield on the U.S. 10-Year Treasury Note. As you can see, fixed rates have been coming down since the peak in 1982. Even though we are higher now than the trough set in 2003, the general downtrend is still intact.
Chart: U.S. Prime Rate 1960–Present
The chart above provides a broad view of the Prime Rate since 1960. Changes in monetary policy by the Federal Reserve directly influence the Prime Rate and have a similar influence on variable rate mortgage loans. The pattern is much like the 10-Year Note above. Although we are more than 2% higher now than two years ago, we have not breached the downtrend line established since the early 1980s.
Interest rate data are derived from the U.S. Federal Reserve Bank.
Back to Top 
