Time for an update on mortgage rates!Â
As has been written in this space before (here and here), mortgage rates are currently being drivenÂ by inflation expectations.Â The Federal Reserve has been focused on supporting the economy by lowering short-term interest ratesÂ at the expense of the dollar, which is one cause of inflation (another major one being the huge demand for oil/energy in China).
The graph on the left compares mortgage rates for 30 year fixed loans, in blue, to the rates for 10 year Treasury Bonds, in green.Â For the second half of 2007 and the beginning of 2008 they moved in lockstep.
After a series of aggressive government actions in late January, and then the Bear Stearns “deal” in March,Â Wall Street finally realized that the Federal Reserve would continue to cut interest rates to support the economy.Â Whatever it takes.Â Thus inflation is a real concern.Â This can be seen in the chart as both theÂ blue and green lines find bottoms and beginning to increase (higher rates).
AnÂ immediate question that jumped out at me: WhyÂ did mortgage rates jump even more thanÂ the Treasury rates in 2008?Â One factor at play is the difference in duration of the two loans.Â 30 year fixed mortgage rates are far more sensititve to inflation than 10 year Treasury bonds because they extend 20 years longer.Â I’d have to do some serious math to figure out how much of the impact can be explained by duration, so let’s just say that it is one factor and others are also possible.
Last week there was an important shift in the government’s position.Â Ben Bernanke, Federal Reserve Chairman, said that the Federal Reserve Board is “attentive to the implications of changes in the value of the dollar for inflation and inflation expectations.”Â This is the first direct acknowledgement that inflation is of concern, and Wall Street intepreted the statement to mean that there will not be any more interest rate cuts.
For us in the real estate market, Mr. Bernanke’s statement seems to have hurt more than helped.Â Wall Street has reacted by bidding up interest rates – they seem to be using his statement to support their fears that inflation could increase.Â Higher mortgage rates tend to hurt sellers as the purchasing power of buyers decreases.
Of course all of us already knew that inflation was beginning to hurt, and if you didn’t, then you must not be driving or watching the news…