Fed Extends Low Interest Rate Plan Through Late 2014

Mortgage rates have been hovering near record lows for the past 18 months. That trend is now expected to continue to benefit borrowers well into 2014. On January 25th, the Federal Reserve extended its plan to keep short-term interest rates down through at least late 2014 to help bolster the U.S. economy. The Fed previously pledged to keep rates low until mid-2013. But with inflation tame and more than two years of high unemployment, the economy needs a jump start and the Fed still believes that very low rates will help. By publicly stating its intentions to hold down short-term rates, the Fed hopes to put downward pressure on long-term rates. At the same time, a lack of confidence in the global economy, the government debt crisis in the European Union and volatile financial markets have prompted investors to continue to seek the relative safety of Treasurys, which has pushed down yields.

Though the U.S. economy appears to be expanding moderately, global growth is slowing. On January 24th, the International Monetary Fund cut its forecast for growth and warned of a deeper downturn if Europe fails to resolve its debt crisis. IMF now expects the global economy will expand 3.3% in 2012, down from the 4% pace it forecast last September. The global economy grew at a 3.8% pace in 2011. Forecasters look for inflation to fall in 2012, which could prompt the Fed to resume its U.S. government bond buying program in the spring to push down mortgage rates. This would encourage investment and could boost demand for farmland.

The interest rate on 10-year Treasury bonds—a benchmark indicator for mortgage rates—was yielding 2.05% as of February 21st, under the 2.4% June 30, 2012 projection by the Philadelphia Fed’s widely followed December Livingston Survey, which summarizes forecasts of 39 economists from industry, government, banking and academia. The Livingston Survey predicts that 10-year Treasury bond will reach 2.75% at the end of 2012, and 3.16% at the end of 2013. 

Borrowing costs on both fixed- and variable-rate farm real estate loans generally continued to ease through the fourth quarter of 2011. Lower borrowing costs expand both the number of qualified potential buyers of farmland and the price they can afford to pay for land. Banks charged an average 5.5% on variable-rate mortgage loans in the October through December 2011 period; fixed rates averaged 5.9%. Variable rates ranged from a low of 3.9% among Farm Credit banks in the Heartland, to 5.8% across the Dallas Fed region. Fixed rates ranged from 5.2% in the Midwest to 6.4% in the Dallas Fed district. 

Source: Farmland Investor Letter analysis of Federal Reserve data.

Source: Farmland Investor Letter analysis of Federal Reserve and AgriBank data. *Heartland region includes Ark., Ill., Ind., Iowa, Ky., Mich., Minn., Mo., Neb., N.D., Ohio, S.D., Tenn., Wis., and Wyo. Because the Chicago Federal Reserve doesn’t collect variable rate data on farmland loans, we use the quarterly average variable rate charged by AgriBank-funded Farm Credit Services associations as a proxy for the region.

The lower interest rate advantage that Midwest borrowers enjoy over Western U.S. borrowers has narrowed from an average 107 basis points in 2010 to 70 basis points through December 2011. The mortgage interest spread between the Chicago and San Francisco Federal Reserve Districts for fixed-rate farm real estate loans expanded modestly for the second consecutive quarter to 70 basis points. The spread has averaged 89 basis points since the first quarter of 2003. (1 basis point = 1/100th of a percentage point.)