Free Money

Add this to the list of reasons why demand is so hot…..

For the first time since 1980, the cost of living is rising faster than the average mortgage rate.

The Consumer Price Index for April tells us U.S. inflation is growing at a 4.2% annual pace, the largest jump since the bubble days of 2008. Meanwhile, Freddie Mac’s rate for a 30-year mortgage averaged 3.1% in the same month, a smidgen above record lows.

That puts the cost of home loans at 1.1 percentage points below inflation. Let my trusty spreadsheet tell you how topsy-turvy that really is: Over the past half-century, mortgages were an average 4 percentage points above the inflation rate — though that gap’s been halved in the past decade.

Inflation rates topping mortgage rates have happened in just 34 of the 601 months — that’s 50 years — since this loan index started in 1971. That’s just 6% of the time.  The last occurrence was August 1980, when inflation was an ugly 12.9% and mortgage rates were 12.6%.

Link to Article

Rates Are Lower

Mortgage rates have settled down nicely, and are back in the high-2s for those home buyers who don’t mind paying a half-point or so (those quoted above are with zero points paid).

Not sure that it matters. Not sure that anything matters any more.

I had a great conversation with a top Compass agent today discussing the market conditions.

Specifically, what do you tell buyers?

Thankfully, the market is so hot that we have more sales to rely on.  Even with the prices going up, at least there are a few recent sales nearby that help to substantiate the trend.

Is adding 1% per month to pricing enough to keep up with the actual? 1.5%?

Or how about 2.0% per month in the quality mid-range markets, both local and national?

Mortgage Rates And Home Prices

Matthew makes the case here that the current uptick in mortgage rates may not affect home prices:

There was a big rate spike at the end of 2016 that had no discernible effect on prices.  This is notable because that rate spike was fueled by economic optimism as opposed to 2013’s rate spike which happened after the Fed said they would begin decreasing their rate-friendly bond buying program.  2018 was somewhat similar as the Fed was continuing to tighten monetary policy and raise short term interest rates.

A case could be made that the current rate spike shares some similarities with 2016.  The path of 10yr Treasury yields (a benchmark for longer term rates like mortgages) has largely traced pandemic progress and economic recovery hopes.  Yields (aka rates) began rising late last summer as vaccine trials showed promising results and economic data began to improve.

Rates spiked more quickly in the new year as vaccine logistics ramped up and covid-relief legislation was passed.  Fiscal spending hurts rates both due to both its positive implications for the economy (a stronger economy supports higher rates) and the implication of more US Treasury issuance (more Treasury supply = lower bond prices = higher bond yields = higher rates).

But it is predicated on mortgage rates staying about where they are today, which is around 3.0% – 3.25%.  The demand has been strong enough that rates in the low-3s should be acceptable and that the bidding wars will sort out the rest of what happens to pricing.

He also makes the case that the 10-year bond yield and mortgage rates have re-connected.  The 10-year closed at 1.71% yesterday, and if things go right, it will stay in that ballpark.

But there has been times when the 10-year has kept rising. If that happens again, we might see 4% rates:


If mortgage rates get back to 4%, we should see pricing flatten out. Let’s keep an eye on the 10-year yield!

Read full article here:


Payment Adjusted for Rate & Inflation


Thanks to just some guy’ for sending in this article comparing prices, rates, and inflation:


It’s a feel-good idea that inflation and lower rates can ease the pain of higher prices.  But recent pricing has been really painful for buyers!  Let’s apply the data to our local action (using 80% of MSP):

NSDCC Detached-Home Sales, February

# of Sales
Median SP
Mortgage Rate
Monthly Pmt

It’s a nice idea, and higher rates did cool things down a bit in 2018. But today’s market is so explosive that we are blowing through all the usual stop signs – look at the number of sales!

My guess is that there will be additional sellers pulled forward from future years, just like with buyers – it’s too lucrative and tempting to find a way to sell now. Might it mirror the covid-recovery trend line?

Inventory Watch

My theory this week to explain what’s happening today?

The ultra-low mortgage rates are the problem.

Specifically, the decline in mortgage rates over the last two years have caused more of the existing homeowners to refinance, rather than move.  In the graph above, you can see how the supply of homes for sale has declined in a similar trend to mortgage rates. Low rates have spurred more interest from buyers, but the drop in supply hampers their ability to take advantage of it.

If and when rates rise, it won’t change the problem with low supply because the refinanced homeowners have packed it in – they’re not moving no matter what happens to rates. They are locked in forever!



Mortgage-Rate Massacre

This is turning into the February mortgage-rate massacre, and there’s no real end in sight.  But home sellers aren’t going to believe for weeks or months that they might have to back off their price, so don’t expect any changes.

To say that bond market volatility has been elevated recently is an understatement of extreme proportions.  Things are happening that haven’t happened in years.  Some measures of volatility rival the March 2020 panic surrounding covid, only this time, there’s no catalyst other than the market movement itself.

Today was by far the worst of the bunch when it comes to this most recent spate of volatility.

Most any mortgage lender added another eighth of a percent to their 30yr fixed rate offerings.  Over the course of the past week, most lenders are .25-.375% higher.  And compared to the beginning of last week, many lenders are a full HALF POINT higher.  In other words, what had been 2.75% is now 3.25%.  What had been 2.875% is now 3.375%.

Are this high rates in a historical context?  Not at all.  Before covid, they’d be in line with record lows.

But relative to the recent lows, this rate spike is getting to be about as abrupt as we’ve seen in the past few decades–not quite on par with the worst offenders, but close enough to be in their same league.



Rates Take A Beating

If you are thinking of selling your house this summer, expedite your plans!

Volatility has returned to the mortgage market in grand fashion this week with many lenders quoting rates that are as much as a quarter of a point higher than they were last week.  That means if you were looking at something in the 2.75% neighborhood on Friday, it could be 3.0% today. What gives?

The upward pressure is nothing new, really.  It has existed in the broader bond market since August, but only recently began spilling over to the mortgage market.  We’ve been discussing the increased risks of such a spillover in the event of a sharper bond market move and yesterday brought just such a move.  Today was much more docile by comparison, but it didn’t do anything heroic to push back against yesterday’s weakness.

Still, there could be some promise of stability in the fact that the bond market was even able to hold steady today.  Reason being: economic data and other events clearly suggested another bad day for bonds.  Retail Sales surged at one of the best paces on record and inflation rose abruptly at the producer level.  Both of those headlines make strong cases for higher rates, but Treasury yields ended the day slightly LOWER than yesterday.  That sort of resilience may be a clue that bonds have had enoughweakness for now (bond weakness = higher rates, all other things being equal).

Mortgage lenders are WIDELY stratified in terms of rate offerings with the more aggressive crowd averaging 2.875% (no points) on top tier 30yr fixed refinances and the less aggressive crowd being closer to 3.125% (conventional 30yr fixed).

Link to Article

Direction of Rates

A good article by Matthew on the current rate environment:

Bonds find themselves in an interesting position heading into February.

On the one hand, there’s a well-established tepid recovery narrative that coincides with gradually rising 10yr yields for the past 6 months and, more recently, mortgage rates that begun to take notice.  On the other hand, several of the inputs driving those trends are open to criticism, push-back, or other intervening factors that may collectively say “not so fast” to the rising rate trend.

Econ data can bat for either team in this regard and this week brings the month’s biggest reports with ISM PMIs and the big jobs report (NFP).  A unified message from the data will likely matter to the bond market, but it might be hard to tell unless those “not so fast” factors are staying silent.

For the sake of clarity, let’s identify these teams.

Team Rising Rates

  • Significantly lower covid case counts (new daily cases are roughly a third of what they were a month ago)
  • Vaccine optimism and actual vaccine distribution
  • The reopening of economies and re-employment of laid-off workers
  • Resilient-to-stronger econ data
  • Fiscal stimulus and other sources of excess bond issuance (lots of corporate bonds right now as well)
  • Potential progress toward the Fed’s reflationary goals and the eventual inevitability of an attempt to taper asset purchases

Team Not So Fast

  • Permanent job destruction – we’re still 10 million jobs short of pre-covid levels and Friday’s forecast calls for only 50k more.  At that pace, it takes 16+ years to get those jobs back.
  • Vaccine roll-out inefficiencies
  • New covid strain uncertainties
  • Political gridlock (decreases Treasury issuance threats)
  • Ongoing Fed support implied by lackluster job growth and stubborn reflationary impulses
  • The fear of a stock market correction–one that becomes more likely if rates rise too much or too quickly
  • General momentum.  After all, 10yr yields have been in that linear uptrend for 6 months, making rising rates increasingly susceptible to some technical push-back.

Economic data occupies a very interesting space on both of these teams.  Sure, it’s all about covid first and foremost, but covid’s market impact is really all about the economy.  In that sense, econ data does more than anything to decide who wins this game.

So why don’t we see bigger reactions to the data?  Simply put, even when it comes to significant reports, they’re nothing more than points scored in the middle of a very long, very close game.  As long as both teams continue to score, econ data will be hard-pressed to cause a panic in the bond market.  But if one team manages to dominate the momentum–i.e. multiple successive econ reports that are much stronger (or weaker) than forecast–rates would likely react accordingly.

Even then, the nature of covid and the current economic reality means that the data could still be questioned if there are current fundamental developments that logically argue that case.  For instance, data could be tepid, but if covid case counts are dropping and vaccination rates are ahead of schedule, traders might trade a brighter outlook and simply wait for the econ data to confirm.  Conversely, data could be on the up and up, but if something about the covid/vaccine situation deteriorates, traders could disregard near-term economic successes for fear of more lockdowns and unemployment.


Pin It on Pinterest