When I bought my house last year, I thought I was getting a screaming deal @ 4.875% for a 30-year fixed mortgage. Then rates kept dropping. I re-financed @ 4.0% in Febrary, again thinking I had beaten the market. Now rates are at 3.75% (data from mortgagerefinancerates.org). I wondered, how much lower can they go?

30-year mortgage rates are tied to 10-year treasuries

First, I tested the hypothesis that 30-year mortgages are tied to 10-year treasury yields. I looked at the correlation of 10-year treasuries and 30-year treasuries over the past few years. Indeed, 30-year fixed mortgages are more closely correlated to 10-year treasuries (R-squared of .74) than 30-year treasuries (R-squared of .45).

But there’s an interesting split in both graphs. For data points prior to the crash, there appears to be a different trend than after the crash. I looked at data since 2010 and found that the 10-year treasury and 30-year fixed is even more closely linked (R-squared of .94):

So how low can rates go?

Using the data since 2010 and assuming 10-year treasuries can’t go below 0% interest rate, using linear regression, one can assume the lowest 30-year fixed can be is 2.75%.

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