No, rising mortgage rates do not mean home prices will fall
The Federal Reserve raised short-term interest rates again this week, a week when the Freddie Mac weekly survey showed the 30 year fixed rate Mortgage to be 4.45%, up 0.5% since the beginning of the year.
Almost inevitably, the spectre of rising mortgage rates has brought concern that the impact will be felt in home prices – as in they might stop rising or even fall.
Thus, a recent report by Freddie Mac Nowhere to go but up? is very timely.
The report looks at the impact of rising mortgage rates on the six occasions since 1990 that mortgage rates have moved up by more than 1%.
Freddie Mac finds that the greatest impact is felt by home builders, mortgage brokers and real estate agents. As for home prices, Freddie Mac writes:
“While there is a drop in the demand for homes, there is an associated drop in the supply of homes from the link between the selling and buying decisions. As both supply and demand move together in this way they have offsetting effects on price—lower demand decreases price and lower supply increases price. Exhibit 6 shows the Freddie Mac National House Price Index from 1990 to June 2017. It is unresponsive to movements in interest rates. In the current housing market, the driving force behind the increase in prices is a low supply of both new and existing homes combined with historically low rates. As mortgage rates increase, the demand for home purchases will likely remain strong relative to the constrained supply and continue to put upward pressure on home prices. However, the combination of increasing rates and increasing house prices would be a double hit to affordability for first-time home buyers.”
The table below shows the detailed movements in the various categories relating to home sales during the 6 periods of rising mortgage rates.
And finally, I repeat the chart below showing the direct correlation between the 30 year FRM and the yield on the10-year Treasury.
If you – or somebody you know – are considering buying or selling a home and have questions about the market and/or current home prices, please contact Andrew Oliver on 617.834.8205 or Kathleen Murphy on 603.498.6817.
If you are looking to buy, we will contact you immediately when a house that meets your needs is available. In this market you need to have somebody looking after your interests.
Are you thinking about selling? Read Which broker should I choose to sell my house?
Andrew Oliver and Kathleen Murphy are Realtors with Harborside Sotheby’s International Realty. Each Office Is Independently Owned and Operated
@OliverReports
Mortgage Rates: Relative versus Absolute
When my daughter was growing up I tried to impress on her the importance of understanding the difference between relative and absolute. Here’s an example: the forecast for next week’s snowstorm (as of Friday) was for 7 inches of snow. On a relative basis, after about 15 inches this week, that will be much better. But on an absolute basis it will still be a pain.
My attention was grabbed by an email I received yesterday with the headline: “Mortgage rates hit 5 week low.” Ignoring the fact that I can’t actually find the source for the claim (I am sure it exists) let’s look at the rate that I use most often in my articles about mortgage rates: the Freddie Mac weekly survey. Here’s a chart of the weekly rate this year:
Freddie Mac weekly survey
While a different source may have different actual numbers, it is pretty obvious that, while rates may be relatively lower this week, in absolute terms they are still about 0.5% higher than they were at the start of the year.
Mortgage rates, closely following the yield on the US 10 year Treasury as they do, often move quite sharply – up or down – over a short period of time. And whenever this move is upward a number of commentators, relishing their 15 minutes of fame, rush out statements claiming that the increased rate will have a negative impact on housing prices as homes become less affordable.
There are many factors in the decision to buy a home (rising income and optimism about the future are two that seem to get less attention than mortgage rates), but let me show a chart showing the history of the FRM for the last 40 years. The chart is not very clear when reproduced, but the message is that it is only in recent years that mortgage rates have dropped below 5%.
A year ago the FRM was 4.3%, which happened to be the highest rate for the year. And a year ago the yield on 10T was 2.6%, also the highest rate for the year. Several commentators have forecast this week that the yield on 10T may have peaked for this year when it reached 2.94% in February.
In my recent article What will happen to Home Prices in the Experimental Economy? I wrote: “Whether or not inflation does increase beyond the Fed’s 2% target, there is going to be a major increase in the amount of Treasuries that need to be sold this year to finance the sharply increased budget deficit. And this will occur when the Fed has switched from being a buyer of Treasuries to a seller, and when the projected weakness of the dollar makes buying anything in the US less attractive to foreign investors. If the supply increases and demand decreases, then prices should go down – which in bond markets means higher interest rates.”
Commentators suggest some of this effect may have been behind the recent rise in yields.
But enough. I hope this article and the others to which there are links give some perspective on recent moves in mortgage rates – which in absolute terms remain attractive.
If you – or somebody you know – are considering buying or selling a home and have questions about the market and/or current home prices, please contact Andrew Oliver on 617.834.8205 or Kathleen Murphy on 603.498.6817.
If you are looking to buy, we will contact you immediately when a house that meets your needs is available. In this market you need to have somebody looking after your interests.
Are you thinking about selling? Read Which broker should I choose to sell my house?
Andrew Oliver and Kathleen Murphy are Realtors with Harborside Sotheby’s International Realty. Each Office Is Independently Owned and Operated
@OliverReports
What will happen to Home Prices in the Experimental Economy?
(Click here to download a pdf of this report.)
This article is a follow up to my Why have mortgage rates spiked? article published two weeks ago, and sets out some thoughts about the outlook for residential real estate as we enter an Experimental Economy.
What is an Experimental Economy?
Let’s try to compare the economy in a recession to a car pulling a trailer, with a full load of passengers, while going uphill. What does the driver do? To offset the gradient and the weight being pulled, she pushes on the accelerator pedal, the extra effort allowing her to maintain speed. And when she gets to the top of the hill? She eases off the pedal so that she can avoid speeding and the risk of losing control.
Now, let’s look at the economy. As we emerged from The Great Recession, the Federal Reserve (Fed), understanding that the economy was facing a sharp incline, had its foot hard down on the accelerator (cheap and plentiful money), dragging the car (economy) with its trailer (unemployment) up the incline.
After an initial period, the car slowly regained its speed and as it neared the top of the hill the driver started to ease off on the accelerator (raising interest rates and buying fewer Government securities – Treasuries).
And then, the car reached the top of the hill (historically low levels of unemployment, an economy growing steadily). So, what does the driver do now? Well, based upon historical evidence, the driver (Fed) raises interest rates, while the Government tries to run a budget surplus to squirrel away funds for the next recession.
The Fed has done its part, but the Government, as in Congress, has decided that it is time for an Experimental Economy. Instead of taking the foot off the accelerator, Congress has passed a series of tax cuts and spending increases which will more than double the Budget Deficit. Rather than easing up on the accelerator, Congress has decided to push its foot down even harder.
I call what we are entering now the Experimental Economy, the experiment being that we are betting that the tax cuts and spending increases will lead to faster economic growth, which in turn will reduce the budget deficit.
It’s different this time because….
During periods of strong movement, either up or down, whether in stock markets or economies, one frequently hears pundits explaining why “this time it is different.”
During the yearly years of Quantitative Easing (monetary policy in which a central bank purchases government securities or other securities from the market in order to lower interest rates and increase the money supply) many economists forecast that such an unprecedented increase in the money supply would inevitably lead to renewed inflation.
That did not happen for a variety of reasons: the depth of the recession in the US and the longer recession in Europe, the emergence of the US as the world’s largest oil producer. The result was that the longer that inflation did not recur the more the experts claimed that “this time it’s different.”
But, as Winston Churchill said: “Those who fail to learn from history are condemned to repeat it.”
What could go wrong with the Experimental Economy
Those who are predicting that strong growth will follow from the major stimulus to the economy may be proved right. If not, the risk is that stimulating the economy at a time of full employment will cause the Fed to raise interest rates aggressively and choke off the hoped for economic growth.
If you have been watching the Olympics, you may have seen the bobsleigh or bobsled events. Stepping on the gas at the top of the economic hill might be compared to jumping in a bobsleigh and hurtling down the track.
In this photo of a 4 man team, the man at the back – the brakeman – appears to have his head down, as if in prayer. I am wondering if he is the Federal Reserve Chairman who has just been told that Congress has passed another spending bill.
At least the traditional bobsleigh has a sold frame, with a driver and brakeman. Let’s hope the economy resembles the 4 man bob rather than the skeleton bobsleigh below.
Why Treasury yields may continue to rise
I have written many times in recent years that the law of supply and demand has applied to home prices, in comments like: “economic growth, low interest rates, strong demand and low supply will lead to higher prices.”
Whether or not inflation does increase beyond the Fed’s 2% target, there is going to be a major increase in the amount of Treasuries that need to be sold this year to finance the sharply increased budget deficit. And this will occur when the Fed has switched from being a buyer of Treasuries to a seller, and when the projected weakness of the dollar makes buying anything in the US less attractive to foreign investors.
If the supply increases and demand decreases, then prices should go down – which in bond markets means higher interest rates.
What will happen to residential real estate prices
While many commentators have expressed the hope that rising interest rates might slow the demand for real estate, there is a converse argument that recent tax changes may encourage people to stay in their existing homes. A longer-term encouraging sign is the recent sharp increase in both housing starts and building permits, but in the short-term demand seems set to continue to outstrip supply.
And historically, real assets like homes have benefited in times of inflation.
If you – or somebody you know – are considering buying or selling a home and have questions about the market and/or current home prices, please contact Andrew Oliver on 617.834.8205 or Kathleen Murphy on 603.498.6817.
If you are looking to buy, we will contact you immediately when a house that meets your needs is available. In this market you need to have somebody looking after your interests.
Are you thinking about selling? Read Which broker should I choose to sell my house?
Andrew Oliver and Kathleen Murphy are Realtors with Harborside Sotheby’s International Realty. Each Office Is Independently Owned and Operated
@OliverReports
Why mortgage rates may be headed upwards – finally
At my son’s wedding recently, his father-in-law said “I used to be a banker, but I’m better now.” In similar vein, I confess that I have a degree in economics from Oxford, although in self-defense I should add that the degree also included philosophy and politics. Or maybe that is not a defense.
As this blog is dedicated to helping people understand as much as possible about factors affecting real estate markets I write from time to time about mortgage rates. The key to understanding where mortgage rates are headed is to know that the price of the 30-year Fixed Rate Mortgage (FRM) is based on the yield on the US Government’s 10-year Treasury Note (10T) – and that yield is set by the bond market, not by the Federal Reserve.
Rather than explain this in more detail here I will link to two articles I have written in the recent past: Are mortgage rates going to 5%? and Why have Mortgage Rates dropped below 4%? and show two charts.
The first chart shows the course of rates over the last two years. The Fed Funds rate is the one announced by the Federal Reserve and affects short-term interest rates for items such as credit cards, auto loans and adjustable rate mortgages. Note that while the FF rate has moved up steadily, the yield on 10T spiked after the 2016 Election, trended down during the spring and summer months, and has recently moved up again. This chart clearly shows that there is no link between FF and FRM.
The second chart shows the difference between the 30-year Fixed Rate Mortgage and 10T. The numbers shown for 2013-2016 are averages for the entire years; the data for 2017 is the spread on those days. Note how consistent the spread has been at +/- 1.7%. And note that the current spread is below 1.5%, suggesting that the FRM is about to increase.
Why the FRM may rise in 2018
Behind all the political drama, the US economy does seem to have gathered strength in recent months, with back to back quarters showing 3% GDP growth. It seems likely that Congress will pass some measure of tax cuts and it appears that businesses have started to invest more. Inflation is below the Fed’s target but is also picking up, while unemployment, as officially measured, is extremely low. All these factors suggest that the yield on 10T may continue to increase and that in turn will lead to an increase in the FRM.
Why the FRM may not rise in 2018
In one word, Amazon. OK, I am exaggerating, but I remember some 20 years or so the famed economist, Brian Reading, explained to me why he believed inflation was no longer a threat in the US. He called it the Marshall’s effect – Never, Never, Never pay Full Price. Consumers learned to shop around and find the cheapest source – and, of course, the internet helped that process.
Back to Amazon. Recently, it bought Whole Foods and seemingly has plans to shake up the grocery market.What if Amazon decides to get into the health care market? Of is somebody else does. Disruption has occurred in many industries over the last decade – but not in health care, which represents nearly 20% of GDP.
All the focus in healthcare has been on extending coverage but much less focus has been on controlling costs. Maybe that will change.
But probably not in 2018, so at the moment it does seem likely that mortgage rates will follow the 10T and see an increase in 2018.
If you – or somebody you know – are considering buying or selling a home and have questions about the market and/or current home prices, please contact Andrew Oliver on 617.834.8205 or Kathleen Murphy on 603.498.6817.
If you are looking to buy, we will contact you immediately when a house that meets your needs is available. In this market you need to have somebody looking after your interests.
Are you thinking about selling? Read Which broker should I choose to sell my house?
Andrew Oliver and Kathleen Murphy are Realtors with Harborside Sotheby’s International Realty. Each Office Is Independently Owned and Operated
@OliverReports
Are mortgage rates going to 5%?
I read this comment recently: “Freddie Mac’s Primary Mortgage Market Survey shows that interest rates for a 30-year mortgage have hovered around 4%. Most experts predict that rates will rise over the next 12 months. The Mortgage Bankers Association, Fannie Mae, Freddie Mac and the National Association of Realtors are in unison, projecting that rates will increase by this time next year.”
The Mortgage Bankers Association (MBA) is the United States national association representing some 2,200 companies involved in mortgage finance. MBA produces monthly forecasts of, among other things, the 30 year Fixed Rate Mortgage (FRM) rate. With their knowledge base, it might be reasonable to expect their forecasts to be quite accurate, so let’s look at their forecasts in recent years. In particular, I want to look at their forecasts for the year after the one in which the forecast was made.
2014
Throughout 2014 MBA expected the 2015 FRM to be over 5%. It was 4.0%.
Source:MBA
2015
Throughout 2015 the MBA expected the 2016 FRM to be well over 5% (are you seeing a pattern here?) It was 3.8%.
Source:MBA
2016
At the start of 2016 the MBA expected the 2017 FRM to be over 5%, but by July had lowered the forecast to 4.4%.
Source:MBA
2017
At the start of 2017 the MBA forecast the 2018 FRM to be – yes, over 5%. By July the forecast had dropped to 4.9%, a level maintained in its September forecast just published.
Source: MBA
How were the current year forecasts?
As I have pointed out many times in my articles on mortgage rate, forecasting the future is….. complicated. And like hurricane forecasts, the further out the prediction, the greater is the likely margin of error. But MBA has not done much better with its current year forecasts, as can be seen in the tables. Its over-estimate at the beginning of the year was 1.1% in 2014, 0.9% in 2015 and 0.8% in 2016. And rates will have to jump before the end of the year if 2017 is to be any better, as the current rate is 0.9% below the MBA forecast in January.
Why has MBA been so wrong?
The FRM rate is based upon a margin over the yield on the US Treasury 10 year note (10T). In recent years that margin has averaged 1.7%. In general, the yield on 10T reflects economic performance and expectation. And many economists, not just MBA’s, have been forecasting that, with all the financial stimulus injected in recent years, inflation would pick up as the economic expansion created more demand for goods and workers. And higher inflation would lead to higher interest rates being demanded by buyers of fixed income securities such as 10T.
I have written many articles since the Federal Reserve started increasing short-term interest rates in December 2015 pointing out that the Fed Funds rate influences things like auto loans, credit card rates and adjustable rate mortgages, but that the FRM follows 10T.
What will happen to mortgage rates in 2018?
The point of this post is not to point fun at MBA’s economists and neither is it to make a forecast for 2018. It is to point out, once again,that home buyers should be focused on finding the right house – a difficult enough task with today’s lack of inventory- rather than mortgage rates. And as a mortgage broker friend pointed out to me, anybody who could refinance in recent years has already done so to lock in recent low rates.
The key to knowing what will happen to the FRM is to follow one number – the yield on 10T.
Are you thinking about selling? Read Which broker should I choose to sell my house?
Please contact me on 617.834.8205 or [email protected] for a free market analysis and explanation of the outstanding marketing program I offer
If you are looking to buy, I will contact you immediately when a house that meets your needs is available. In this market you need to have somebody looking after your interests.
Andrew Oliver is a Realtor with Harborside Sotheby’s International Realty. Each Office Is Independently Owned and Operated
@OliverReports
What does Federal Reserve rate increase mean for Mortgage Rates?
For the fourth time in the last 18 months the Federal Reserve increased short-term interest rates by 0.25% this week, bringing the total increase over this period to 1.00%.
After each increase in the Fed Funds rate (FF), I point out that the FF does not directly affect the 30 year Fixed Rate Mortgage rate (FRM), whose price is more closely related to the yield on the US 10 year Treasury (10T).
Let me illustrate this point in one chart:
Source: US Treasury, Freddie Mac
Why have mortgage rates dropped below 4%?
The average 30 year Fixed Rate Mortgage (FRM) fell below 4% this week for the first time in 5 months. Why has this happened? (more…)
Are mortgage rates headed higher?
For the third time since December 2015 the Federal Reserve (Fed) increased interest rates this week. The increase, like the two prior ones, was 1/4%. What does this mean for mortgage rates? The key is to understand which rates are impacted by the Fed Funds (FF) rate and which are dependent upon interest rates set by the market.
Which rates are based upon the Fed Funds rate?
30 year fixed rate mortgages (FRN) are not based on the FF rate, but are most closely tied to the yield on 10 year US Treasuries(10T). More on that in a minute.
The prime rate directly follows the FF rate, is set by banks and is consistently at a margin of 3% above the FF rate. Immediately after the increase in the FF rate, all the major banks raised their prime rates from 3.75% to 4.00%.
Interest rates which follow prime rate are home equity lines of credit (HELOC), credit cards and auto loans. The only direct property-related impact is on HELOCs. Note the difference between home equity loans – which are for a fixed amount at a fixed interest rate – and HELOCs, which are for a varying amount at an interest rate which varies with the prime rate. The interest rate on a HELOC is normally stated as “prime plus (or minus) x per cent”, so the interest rate on these will increase immediately.
Fixed Rate Mortgages
FRM rates are set by individual banks and are dictated by market conditions. Most conforming mortgages are sold to investors in the form of mortgage-backed securities. The yield demanded by investors is most closely linked to a premium (spread) over the yield on US Treasury 10 year Notes (10T). The yield on 10T is often seen as an indication of the strength of the US economy, although it can also be influenced by geo-political factors which can cause a flight to safety (foreign buying of US Treasuries) in times of uncertainty.
When the Fed first increased rates in December 2015, the yield on 10T was around 2.25%. In my comment I wrote: “If commodity prices remain weak, there will be a significant deflationary impact felt in several countries; China’s slowdown could continue to be a drag; and of course there is always the risk of a major war or confrontation. The US economy is doing quite well, but will not be immune to what is happening elsewhere in the world.” At the time of writing nobody had coined the phrase Brexit, the impact of which in June 2016 caused a flight to quality which drove the yield on 10T down to 1.4% and FRN to under 3.5%.
By the time of the November Election the yield on 10T was around 1.85%. In Why the Election drove mortgage rates up I explained the reasons for the post-Election spike to 2.6%. Consequently, the FRM jumped to 4.32% in December, very close to this week’s 4.30%.
How are Fixed Rate Mortgages priced?
Investors in mortgage-backed securities demand a premium over the yield on 10T. I monitor the spread – the difference between the two yields. First, I show the average since 2013:
The increase in 2016 reflected the period in the summer of that year post Brexit when the yield on 10T dropped sharply for geo-political reasons. The mortgage rates did not follow as closely as demand for mortgages remained strong along with the US housing market. Other than the summer of 2016 the spread has been consistent for the last several years, averaging 1.70% since 2013.
What has happened to rates since the Election?
Immediately after the Election the yield on 10T started climbing, reaching 2.6% by the day after the Fed increased rates in the middle of December. Since then, the yield has been as low as 2.31% and as high as 2.62% before falling back to 2.5% after the latest Fed rate increase. Note, however, that despite all the very active news in 2017 and despite the Fed rate increases, the spread of FRM over 10T has averaged 1.71% so far in 2017, in line with the average for the last several years.
Source: US Treasury, Freddie Mac
Will mortgage rates increase further in 2017?
The Fed expected to increase short-term rates 3 times in 2016 as the economy expanded and inflation started to pick up. This did not happen and there was only the one increase late in the year. The Fed is again forecasting 3 rate increases in 2017, and there is a general expectation that the US will see both faster economic growth and higher inflation in 2017. If these occur, then the Fed’s forecast may well turn out to be correct. The markets certainly expect it to be.
If the Fed is right, it is likely that both employment levels and wage growth, along with inflation, will be continuing to demonstrate growth. In that case the yield on the key 10 year Treasury will increase somewhat and it is that which will lead to higher fixed rate mortgage rates. On the other hand, the strength of the US dollar will serve to dampen inflation, while fear of the impact on the dollar may cause the Fed to be less aggressive in raising rates. While business confidence has increased sharply since the Election, it is unlikely that any possible tax cuts will have an impact on economic growth in 2017.
As an aside, my favorite economist, Brian Reading, was once introduced at a conference (by me) as a “one-handed economist”. That’s because most economists say “on the one hand….. but on the other” whilst Brian made a specific forecast – which usually turned out to be correct.
Overall it seems quite possible that we will see forecasts that the yield on 10T will increase to 2.75-3.0% in 2017 and that in turn suggests that FRM could increase to 4.5-4.75%.
What could happen to cause mortgage rates not to rise?
The Election changed the outlook for growth and inflation in 2017, not just because Mr.Trump was elected President but because the Republican Party retained control of Congress, indicating that its pro-growth fiscal policies would likely be enacted into law. That was the basis for the sharp jump in the stock market and the sharp fall in the bond market, causing yields to spike. The downside risks to the optimistic forecasts for 2017 are that fiscal policy ( tax cuts, less regulation) gets delayed or bogged down in the other “stuff” going on, or that a major geopolitical event occurs somewhere in the world.
At this stage, however, a one-handed economist would say that we will see further increases in FRM in 2017.
Mortgages are still cheap
The guessing game – or forecasting, as economists like to describe it – of what will happen in 2017 should not disguise the basic fact that mortgage rates
today are historically cheap – and may not be as cheap in the months and years ahead. The first chart shows the decline in FRM over the last 25 years:
source: tradingeconomics.com
And now the last 5 years – note that the FRM did not drop below 4% until 2012:
source: tradingeconomics.com
Adjustable Rate Mortgages (ARM)
Throughout the years of declining rates ARMs have been a very successful financing mechanism for those who understand the risks. With the change in outlook for mortgage rates, as highlighted in my Is this the end of ultra cheap mortgages? report right after the Election, it is a good time to look at ARMs for those who understand that ARMs can be a useful part of overall financial planning. Note that the 5/1 ARM rate this week was a full 1% below that of the FRM.
Are you thinking of selling your home? If so please contact me on 617.834.8205 or [email protected] for a free market analysis and explanation of the outstanding marketing program I offer.
Not sure which broker to use to sell your home? Read Which broker should I choose to sell my house?
If you are looking to buy, I will contact you immediately when a house that meets your needs is available. In this market you need to have somebody looking after your interests.
Andrew Oliver is a Realtor with Harborside Sotheby’s International Realty. Each Office Is Independently Owned and Operated
@OliverReports
Mortgage rates set to rise again
The Freddie Mac weekly 30 year Fixed Rate Mortgage (FRM) report showed a further drop to 4.09% this week, but this number does not reflect the increase in interest rates late in the week (the Freddie Mac survey is based on mortgage rates from Monday to Wednesday each week and is published on Thursdays).
How has the mortgage rate moved recently?
The FRM moves most closely with the yield on the 10 year Treasury note (10T). Over the last 4 years the average spread – the difference between the FRM rate and the 10T yield – has averaged around 1.7%. Let’s see how the two rates have moved since the Election: (more…)
Mortgage Rates continue to rise – is this the peak for now?
As expected, mortgage rates increased again this week, reaching 4.3%, a level not seen since….as recently as April, 2014. (more…)
Mortgage rate outlook after Federal Reserve increases rates
For the second time since the introduction of the iPhone (the first was in December 2015) the Federal Reserve (Fed) increased interest rates this week. The increase, like last year’s, was 1/4%. What does this mean for mortgage rates? The key is to understand which rates are impacted by the Fed Funds rate and which are dependent upon interest rates set by the market.
Which rates are based upon the Fed Funds rate?
30 year fixed rate mortgages (FRN) are not based on the FF rate, but are most closely tied to the yield on 10 year US Treasuries(10T). More on that in a minute. (more…)
One reason mortgage rates won’t go up this week
With the near certainty that the Federal Reserve (Fed) will vote to increase interest rates this week, many people assume that mortgage rates will automatically follow. Not so. At least not directly. The Federal Reserve’s decision on interest rates will have no direct impact on fixed rate mortgage rates.
The last time the Fed raised interest rates was just a year ago and at that time I wrote What the Fed’s rate increase means for mortgage rates.
I will update the report after the Fed’s decision on Wednesday. (more…)
Why the Election drove Mortgage Rates up
30 year Fixed Rate Mortgage (FRN) rates are tied to the yield on the US Treasury 10 year note (10T). The spread – the difference between the two rates – has averaged 1.71% since the beginning of 2013, as shown in this chart (the sharp drop at the end reflects the first couple of days after the Election):
Source:US Treasury, Freddie Mac
Now let’s look at what has happened in the month since the Election – after the initial drop the spread has returned to its 4 year average: (more…)
Huge jump in Mortgage Loan Limits
Home buyers in Essex County and Suffolk County received a major boost this week with the announcement that the limit for conforming mortgages was being increased by 18% from $523,250 to $598,000.
For a buyer putting down 20% the price of a home that can be financed conventionally – meaning that it can be sold to Fannie Mae or Freddie Mac – jumps by almost $100,000, from $654,063 to $747,500.
This table shows the trend in the last few years: (more…)
Mortgage rates near 4%: no need to panic
As anticipated in my Is this the end of ultra cheap mortgages? post last week, the rate on the 30 year Fixed Rate Mortgage (FRM) jumped to 3.94% this week, according to the latest Freddie Mac weekly survey. Before we all panic, let’s consider a few facts.
Mortgage rates are historically extremely low
Look at the chart below. Mortgage rates fell below 5% for the first time ever only in 2010. They averaged a little below 4% in 3 of the last 4 years, but even after the jump since the election rates are merely back to where they were a year ago and remain close to all-time lows. And during the boom years of 2004-2006 the average mortgage rates were 6.84%, 6.87% and 6.41%.
Source: Freddie Mac
There is no clear correlation between mortgage rates and home prices
Data for the last 10 years for national home prices starts as the housing boom was already over, but the chart below shows how home prices tumbled from 2007 to 2012 at a time when mortgage rates were also falling. Once the market turned, the spike in mortgage rates in 2013 did not stop the increase in home prices.
Source: Freddie Mac, S&P CoreLogic Case-Shiller
The next chart shows in a little more detail what has happened in the last 4 years. All I can say is that I see no direct correlation in the chart above or the one below between home prices and mortgage rates. That is not to say that mortgage rates do not have an impact on home prices, just that they are not the only factor.
Source: Freddie Mac, S&P CoreLogic Case-Shiller
Is inflation going to rise?
Since the Great Recession, central banks have been pumping cash into world economies in an attempt to stave off deflation – falling prices. Why are falling prices so bad? Because some consumers will defer purchases in the belief that prices will be lower in the future. Since by some estimates consumer expenditure accounts for 70% of the economy, any concerted move by consumers to defer purchases would have a major negative effect on the economy.
So is inflation going to rise now that the Republicans control Congress and the White House? Probably, and that is the bet markets are making, causing the yield on the 10 year Treasury Note (10T) to jump nearly 0.5% in less than two weeks. And mortgage rates follow closely the yield on 10T.
Is renewed Inflation bad news for the economy?
As the Wall Street Journal put it: “The world should welcome higher long-term bond yields insofar as they signal a brighter outlook for economic growth and a return to moderate inflation after years of fear about falling consumer prices. Central banks have been trying hard—especially in Europe and Japan, without much success—to drag inflation higher. The long run of low rates also has battered banks, pension funds and insurance companies.”
Higher economic growth, the ending of the fear of deflation, relief for financial institutions – there’s a lot to like in moderate inflation – the key, of course, being moderate.
How does inflation affect real estate markets?
One of the key aspects of borrowing money in an inflationary environment is that the asset purchased will appreciate, while the loan will be paid back in depreciated dollars. The incentive, therefore, is to buy now before prices rise – the opposite to the concern in a time of deflation.
Will home prices continue to rise?
The chart below shows the growth in national home prices over the last 40 years. My reading of this is that we have now recovered from the sub-prime boom and bust cycle and that prices are likely to continue to grow modestly over time.
Source: Federal Reserve St. Louis; S&P CoreLogic Case-Shiller
If you are considering selling your home please contact me on 617.834.8205 or [email protected] for a free market analysis and explanation of the outstanding marketing program I offer.
Not sure which broker to use to sell your home? Read Which broker should I choose to sell my house?
If you are looking to buy, I will contact you immediately when a house that meets your needs is available. In this market you need to have somebody looking after your interests.
Andrew Oliver is a Realtor with Harborside Sotheby’s International Realty. Each Office Is Independently Owned and Operated
@OliverReports
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