Your two burning questions are most likely: What will happen to mortgage rates? And, does it matter for home prices?
Staring at a 10-year chart of US home prices and mortgage rates, it’s hard not to immediately contemplate this blissful surfer riding a wave as smooth and steady as this climb in home prices.
What will be the cause of this stoked rider ultimately tumbling? Is this one of those new wave pools in Australia that can just propel you on endlessly? Or is this glaring divergence between home prices and mortgage rate direction about to snap shut like the jaws of a 2,000lb great white shark? What invisible (Mr.) hand will be reaching out to slap this slumbering Spicoli?
We will be spending a lot of time in 2021 worrying about higher mortgage rates. Make no mistake; the Federal Reserve is itching to, and can decide to, raise interest rates faster than Mr. Hand can send a time-wasting truant to the front office.
Our economy is surfing along on a deep pool of liquidity, and no one wants to find out what happens at low tide.
Never before have home prices withstood such a shock to employment as was caused by the pandemic. And it has resulted in an imbalance that needs to be managed extremely carefully - how to keep monetary policy loose enough to support a return to full employment, without spurring an unnatural rise in asset prices, including real estate, that will then crash when rates are increased towards their natural, neutral level.
Most Wall Street forecasters share the view that the 10-year t-note interest rate, the most closely linked to mortgage rates, is heading higher in 2021.
We ended the last two quarters around 0.7%, and forecasts call for an increase to around 1.5% in late 2021, with “risk of an overshoot” to 2.0%.
It is impossible to reconcile this forecast with a forecast of an unemployment rate remaining at 6% due to the permanent irreversible damage to small businesses and commercial real estate caused by the shutdowns; but it is fun to watch people try!
These higher interest rates would in theory benefit banks and lending institutions that can generate higher profit margins when the spread between short and long-term rates widens. But other sectors of the economy (the ones that borrow at these higher rates) would suffer.
A fair 2021 prediction is that monetary policy will attempt to come off auto-pilot and spur a contentious debate and some choppiness in asset prices (another prediction is that Trump will likely not be in office anymore to blame the Fed for sabotaging his agenda, and the next President will be more hands-off publicly on this topic).
Looking at the two charts above, national home prices so far this decade have been impervious to multiple mortgage rate cycles and an unprecedented unemployment rate spike. A mortgage rate increase next year of 1% will have a ripple effect on some businesses (plummeting refi volume) but does not seem likely to dent the national home price rally.
Against that macro backdrop, we at ZeroDown are ultimately more focused on local trends in “tech cities” where population and income growth are projected to continue outperforming and new technology is desperately needed to make homebuying and homeownership simpler and more affordable.
Surf now, apocalypse later - beachside graffiti in California.
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