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Could Mortgage Rates Fall 50% From Here?

By Dr. Steve Sjuggerud
Thursday, July 14, 2011

Every year since I can remember, real estate brokers have warned, "You've got to buy now... before mortgage rates go up."
Every year, the majority of economists and experts predict that "interest rates simply can't fall any farther." And then they do.
I don't want to make a prediction today. But I do want to point out two facts:
1) For the last 30 years, the trend in interest rates has been down.
2) Mortgage rates in Japan today are less than 2%.
Let's take a look at each of those facts...
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...
Mortgage Rates Have Been Going Down for Decades
Could mortgage rates go any lower? Of course.
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.
U.S. Treasury Yields Vs. Japan (10-Year)
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...
Japanese Residential Property Index
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%.
Good investing,

Further Reading:

"U.S. real estate is the most affordable it's ever been," Steve writes. "Ever." Learn why he says now is the best time in American history to buy a house here: U.S. Homes: Now the Best Deal in Recorded History.
Steve found a way to "double your money in this flat real estate market." And though it may sound too good to be true, he just paid 20 cents on the dollar for real estate right near the beach. Get the full story here: Oceanfront Florida Lot Just Sold for $164,000.

Market Notes


Today's chart proves collecting royalties is a great business.
Regular DailyWealth readers know royalty companies are one of the ultimate ways to invest in a commodity uptrend. Traditional royalty companies don't risk it all on one or two projects... They finance lots of early stage exploration and production ventures... in return for a cut of production once production begins.
One of the "Cadiallacs" of the royalty sector is $3.5 billion market cap Royal Gold (NASDAQ: RGLD). Royal Gold operates no mines of its own. It simply collects royalties from producing gold projects all over the world. It's a diversified way to make leveraged profits on a rising gold price.
As you can see from the chart below, Royal Gold's wonderful business model allowed it to "sail" through the 2008 credit crisis with minimal share price damage. And just this week, the robust gold price pushed shares to a new all-time high. The trend in gold royalties continues UP.

Royal Gold and its uptrend

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