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Mortgage Rates Approaching Decade-Lows on Coronavirus-Fueled Uncertainty

By Jason Hall - Feb 26, 2020 at 2:09PM

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The 10-year Treasury rate hit an all-time low this week, a key measure that indicates mortgage rates could fall even more.

Homeowners looking to refinance and home buyers shopping for a mortgage are getting good news. In part as a result of ongoing coronavirus worries, mortgage rates have fallen and are near their lowest levels since 2013. According to Mortgage News Daily's rate survey, the annual interest rate on a 30-year fixed mortgage was 3.33%, while a 15-year fixed mortgage could be had with a 3.08% interest rate. 

Mortgage forms and a calculator.

Image source: Getty Images.

Coronavirus fears driving investors to "safety" of bonds

The biggest driver behind the drop in interest rates for mortgages looks to be investor concerns over the impact of coronavirus outbreaks around the world. As the spread of the virus has accelerated, global stock markets have dropped sharply as investors have fled the volatility of equities for the perceived safety of bonds. 

As a result, bond prices have risen, pushing yields lower, which has a secondary effect on mortgage rates. That's particularly evident in the yield of 10-year U.S. Treasury notes, which has fallen to the lowest-ever levels (note: mortgage rate data in the chart below is delayed by five days and does not reflect most-current rates at publication).

30 Year Mortgage Rate Chart

30 Year Mortgage Rate data by YCharts

Rates could continue to fall

The 10-year Treasury is generally considered the benchmark rate that mortgages move with, but it's not always in lock-step. As was noted, the 10-year is at an all-time low, while mortgage rates still haven't quite fallen below the lowest levels seen in 2012 and 2013. If investor capital continues to flow into bonds in coming weeks and months, driving yields even lower, mortgage rates could certainly fall further.

That's even more possible if we see a bigger global impact from coronavirus. Oil prices have fallen nearly 10% in less than a week on expectations that global oil demand will fall in the first quarter for the first time in a decade on reduced demand due to China's attempts to control spread of coronavirus, and if the recent spread of the disease into South Korea, Japan, and Italy impacts the global economy, it's possible the Federal Reserve could respond by lowering the overnight lending rate that underpins almost every interest rate in the U.S.

One company that could profit from a continued drop in interest rates is homebuilder LGI Homes (LGIH -0.74%). The company specializes in entry-level homes for first-time buyers, and reported it closed on 18% more new homes in 2019 during its fourth quarter earnings call. Management is predicting it will sell 16% more homes in 2020 at the midpoint of its guidance with the potential for a 22% increase at the top-end of its expectations. 

Jason Hall owns shares of LGI Homes. The Motley Fool owns shares of LGI Homes. The Motley Fool has a disclosure policy.

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