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How Have Mortgage Rates Changed Over Time?

By Gretchen Wegrich Updated on 8/9/2013

Mortgage Rate Predictions Graph - Will mortgage rates rise? Infographic


As 2011 kicks off, financial experts and economists are making mortgage rate predictions everywhere you turn.  Most of them disagree with each other.  Tracking mortgage rate trends from previous years is simple enough, but guessing where rates will go in 2011 is far from easy and can create confusion.

Mortgage rates fluctuate for a wide variety of reasons, but prime rate adjustments, 10 year Treasury bond yields, and the overall economy are the three most significant contributing factors.  Depending on which of these figures you track, your 2011 mortgage predictions will vary.  This is why many economists offer differing opinions about where the market is headed.

We’ve got our own mortgage rate predictions for 2011.  In the following analysis, we’ll try to provide some insight into mortgage rate forecasts for the coming year, and in the process we’ll look at each of the three factors mentioned above.

  • Prime Rates
  • Treasury Bond Yields
  • Economic Factors

Prime Rates

The prime rate is the rate banks are willing to offer to their strongest borrowers and is often used as a benchmark for the economy as a whole for just this reason.  It is the bottom line rate that banks are willing to offer, and it is based on the Fed Funds rate.  The official published prime rate is a composite built upon the rates offered by many of the largest banks in the nation.

The infographic on this page shows prime rate trends for the past 50 years, as well as mortgage rate predictions built upon prime rate forecasts.

As the graph above illustrates, prime rates have fluctuated heavily in the past 50 years. When the prime rate reached its lowest point in recent history, mortgage rates hit the historic low thatmade last year famous. But these days are likely behind us.

Mortgage rates are not directly tied to the prime rate, but they tend to follow it at a distance. In other words, as the prime rates moves up and down, mortgage rates often follow with a small lag.  This is due to a number of factors, not the least of which is consumer confidence.  Lower prime rates allow businesses to grow and consumers to take out more favorable loans, which tends to improve the economy as a whole.

Many experts predict that the prime rate will remain mostly level throughout the coming year at its current rate of 3.25%, with a few jumps upward to around 3.5% during the year.  Other economic forecasting firms predict that the prime rate will end up around 4% by the end of 2011.  Small changes either way, but even a small change in the prime rate can have a significant impact on mortgage rates a few months down the line.  Many economists who predicts low or stable mortgage rates for 2011 are building these expectations on prime rate forecasts.

Treasury Bond Yields

The 10 year Treasury bond is a security offered by the US Government as a source of public funding.  Mortgage rates rise and fall in close parallel to Treasury bond yields, with mortgage rates about 1.7% higher than bond yields on average.

The reason for this is simple.  Banks package the mortgages they provide into mortgage backed securities, which are then sold to investors.  But mortgages carry some risk, whereas Treasury bonds do not.  When banks sell mortgage backed securities, they are offloading some of this risk onto the investors.  Because investors can always place their money into Treasury bonds with 100% safety, banks must offer investors a rate that is comparatively higher than the rates offered on Treasury bonds.

As Treasury bond yields increase or decrease, banks price mortgage rates higher or lower, respectively.  This is one of the most accurate ways to predict mortgage rates.

US Treasury bond yields are expected to end up higher than at present by the middle of 2011.  Experts expect an increase of about 0.35%, from approximately 3% at present to about 3.35% by July.  Rising bond rates over the past two months has led to the increase in mortgage rates that further slowed the housing market during the final quarter of last year.  With another increase on the way, mortgage rates are set to continue slipping upward.

Economic Factors

Freddie Mac chief economist Frank Nothaft predicted in a recent article that 30 year fixed mortgage rates will stay below 5% for most of 2011.  Other economists have echoed this opinion.  But the mortgage market is swayed by a number of factors, including simple supply and demand and the effects of changes in the economy and the housing sector.

It’s not difficult to understand the mechanics of how the economy will affect mortgage rates in 2011.  Unemployment remains high, disposable income is less disposable, and investors are hesitant. As mortgage rates increase alongside Treasury bonds, wary buyers will find less and less of an incentive to purchase homes.

Economists simply don’t agree about where 2011 will take housing prices. According to a poll conducted by MacroMarkets, a New Jersey financial company, half of leading housing experts believe prices for homes will increase. The other half disagrees.

Veros Real Estate Solutions, a real estate data and technology firm, conducted a thorough study of home prices in most major metropolitan areas of the nation and concluded that roughly 40% of them will see significant price growth in 2011. The firm expects an average home value increase of 3.5%.

Much of last year’s mortgage activity came in the form of a “refinance boom” sparked by historically low mortgage rates. This boom has all but ended with the recent mortgage rate increase, and with no new tax credit in sight, we likely won’t see many new home purchase mortgages from first time home buyers.

This will mean fewer mortgage backed securities on the market for investors to purchase. More investors are likely to purchase Treasury bonds, which will cause yields on Treasury bonds to decrease. This will likely lower mortgage rates. But mortgage rates increase out of necessity as inflation increases. If the job market begins to recover in the coming year, inflation will come to life again, which will force mortgage rates upward.

Economic factors are a mixed bag. It’s uncertain just what will occur with the economy in the coming year, which makes it difficult to predict mortgage rates based on these trends. The economic recovery is largely dependent on job growth and new buyers stepping into the game.


Mortgage rates began to slip upward in the final quarter of last year, and they’ll likely keep increasing.  The Mortgage Bankers’ Association predicts that we’ll see mortgage rates hovering above 5% by the end of the new year.  Rates will likely reach a level close to 6% sometime soon after that. 

According to a recent article in the New York Times, you’re still better off purchasing or refinancing a home now than in any of the past few decades, though it’s important to compare mortgage rates in your area before making financial decisions for the coming year.  More and more homes will likely be purchased with cash.  But this may not be enough incentive to set the entire market back on its feet.  With mortgage rates higher than last year, home prices possibly set to drop, and employment growth still elusive, many potential buyers are unwilling to take the plunge.  The mortgage marketplace will likely remain stuck and slow in the first part of the new year.

Housing analysts at Morgan Stanley published a report that described a best case scenario for 2011 as one in which “things do not get worse.”  At best, it’s evident that mortgage rates in 2011 will remain at levels best described as unusually low.

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About The Author:
Gretchen Wegrich
Gretchen Wegrich is an editor at Lender411. She specializes in mortgage basics, personal finance and green living. She graduated with a bachelor's degree in writing from University of California, San Diego and previously worked at the Santa Cruz Sentinel. Contact her at gretchen@lender411com.

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