Following 4 consecutive monthly increases, results from the Mortgage Interest Rate Survey (MIRS) released by the Federal Housing Finance Agency (FHFA) indicate that mortgage rates fell in April 2017, its second consecutive month of declines. Over the month, contract rates on mortgages used to purchase single-family newly constructed homes declined by 10 basis points to 4.02 percent. Despite the decline, rates remain above the low of 3.54 percent in October 2016.
In the context of the last 6 months, contract rates are higher. However, over the past 35 years, rates are lower. In April 1982 mortgage rates reached 15.13 percent. In the following decades rates have been steadily declining. The figure above illustrates how the decline in mortgage rates have tracked the decline rates on the 10-year Treasury note.
Previous posts (here, here, and here) illustrated the impact of mortgage rate changes on homeownership. However, some research has established a causal link in the opposite direction. Researchers at the Federal Reserve Bank of Atlanta and Princeton University, seeking to understand the impact of demographics on the overall economy, have shown how the connection between population aging and economic growth could be reflected in the response of homeowners to interest rate changes.
Using examples of the interest rate changes in Japan, the analyst starts by noting that “Many researchers have found that an aging population tends to put downward pressure on real interest rates”. The analysts then cite research by Arlene Wong “suggesting that homeownership is a big reason why younger people react more strongly to interest-rate changes than do older people. Younger people generally carry larger mortgages because older people have typically had more years to pay down their home loans. Because they owe more money, younger people have more reason to refinance their mortgages when interest rates drop. And among those who refinance when rates fall, consumption rises much more than among those who don’t refinance, according to Wong.”
The ideas explored by the researchers could have important ramifications for our understanding of housing’s role in the economy. Indeed, analysis by researchers at the Federal Reserve Bank of New York found that, among mortgaged homeowners, the proportion of borrowers above 60 years of age nearly doubled between 2006 and 2016, from 15 percent to 27 percent while the proportion of mortgaged homeowners under 45 fell from 42 percent to 31 percent.
However, as the researchers note, “Demographics is just one of many forces that determine growth and interest rates.” Understanding the role played by these “other forces” could further improve our understanding of the link between homeownership and interest rates.