Mortgage Rate to go to 2%? Like Japan# Stock
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In the 1980s, nobody could imagine a mortgage rate below 10%. In the 1990s,
nobody could imagine a mortgage rate below 7%. In the 2000s, nobody could
imagine a mortgage rate below 5%. Yet here we are, in 2011… and mortgage
rates have spent the last month in the 4.5% range.
As long as I can remember, the trend in interest rates has been down. This
chart shows the trend clearly…
Could mortgage rates go any lower? Of course.
How?
Japan's experience shows us how…
In the late 1980s in Japan, asset prices soared. Stocks, real estate, you
name it. Built on debt, the rise in asset prices in Japan was a bit of an
unintentional pyramid scheme…
People used an inflated asset (like a property or their stock portfolio) as
collateral to buy another inflated asset, further inflating prices. Like the
Nasdaq bubble in stocks or America's housing bubble, prices went up beyond
reason.
Japan's debt bubble burst in 1990 as asset prices fell. The government spent
the next 20 years trying to prop up banks with piles of bad loans.
In the U.S., we certainly have some similarities to Japan. So I've put
together a chart of Japanese interest rates versus U.S. interest rates. (To
compare apples to apples, I've used rates on 10-year government bonds.)
U.S. interest rates are in black. Japanese interest rates are in red. I've
pushed Japanese interest rates forward about 10 years, so their stock market
peak lines up with our Nasdaq bubble peak.
Again, I'm not predicting rates in Japan 10 years into the future… I've
just pushed Japanese rates forward by roughly 10 years.
Right now, interest rates on 10-year U.S. government bonds are about 3%. But
in Japan, they're closer to 1% – and they've roughly been between 1%-2%
for over a decade.
Even though Japan is 10 years ahead of us in facing a major debt deflation,
it is still dealing with it. Property prices are still low. And interest
rates are still very low.
This chart of Japanese residential real estate prices in six major cities
paints a bleak picture… Twenty years after the start of the debt deflation,
Japanese real estate prices are still down by 67%. Real estate prices in
Japan are back down to 1983 levels. Take a look…
Back to the original question… Could mortgage rates in the U.S. fall below
2%?
Don't be too hasty to say "no way."
I'm personally not making any bets on interest rates either way. But before
you make any bets on higher interest rates as "a sure thing," don't forget
that…
1) For the last 30 years, the trend in interest rates has been down.
2) Mortgage rates in Japan today are less than 2%.
nobody could imagine a mortgage rate below 7%. In the 2000s, nobody could
imagine a mortgage rate below 5%. Yet here we are, in 2011… and mortgage
rates have spent the last month in the 4.5% range.
As long as I can remember, the trend in interest rates has been down. This
chart shows the trend clearly…
Could mortgage rates go any lower? Of course.
How?
Japan's experience shows us how…
In the late 1980s in Japan, asset prices soared. Stocks, real estate, you
name it. Built on debt, the rise in asset prices in Japan was a bit of an
unintentional pyramid scheme…
People used an inflated asset (like a property or their stock portfolio) as
collateral to buy another inflated asset, further inflating prices. Like the
Nasdaq bubble in stocks or America's housing bubble, prices went up beyond
reason.
Japan's debt bubble burst in 1990 as asset prices fell. The government spent
the next 20 years trying to prop up banks with piles of bad loans.
In the U.S., we certainly have some similarities to Japan. So I've put
together a chart of Japanese interest rates versus U.S. interest rates. (To
compare apples to apples, I've used rates on 10-year government bonds.)
U.S. interest rates are in black. Japanese interest rates are in red. I've
pushed Japanese interest rates forward about 10 years, so their stock market
peak lines up with our Nasdaq bubble peak.
Again, I'm not predicting rates in Japan 10 years into the future… I've
just pushed Japanese rates forward by roughly 10 years.
Right now, interest rates on 10-year U.S. government bonds are about 3%. But
in Japan, they're closer to 1% – and they've roughly been between 1%-2%
for over a decade.
Even though Japan is 10 years ahead of us in facing a major debt deflation,
it is still dealing with it. Property prices are still low. And interest
rates are still very low.
This chart of Japanese residential real estate prices in six major cities
paints a bleak picture… Twenty years after the start of the debt deflation,
Japanese real estate prices are still down by 67%. Real estate prices in
Japan are back down to 1983 levels. Take a look…
Back to the original question… Could mortgage rates in the U.S. fall below
2%?
Don't be too hasty to say "no way."
I'm personally not making any bets on interest rates either way. But before
you make any bets on higher interest rates as "a sure thing," don't forget
that…
1) For the last 30 years, the trend in interest rates has been down.
2) Mortgage rates in Japan today are less than 2%.