Physical Address
304 North Cardinal St.
Dorchester Center, MA 02124
US Mortgage Rates vs. Inflation (off topic)
Introduction – Basic Economics
First a disclaimer, I am not an economist nor do I have a background in finance, so this is NOT financial advice. I am an engineer by training, but I did take some economics courses in college. I graduated college in 1977 and have bought several houses and refinanced them through the years. And as an engineer, I like to analyze numbers. Most of my readers have much less lived history, and have never in their adult lives seen inflation higher than 3%, so a longer term perspective might be helpful, particularly with inflation rates at a 39 year high.
I can’t make any sense out of today’s home mortgage rates versus today’s inflation. Worse yet, it seems that the projected interest rates by all the talking heads on in the news media and Fannie Mae make no economic sense based on history. It is so crazy. I thought I would bring it up on my blog, which normally covers High Tech and mostly Augmented Reality.
Mortgage vs. Inflation 101
It is basic Economics 101 that interest rates have to be higher than inflation in the long run, or there is no incentive to lend money. While mortgages are long-term loans, they can be refinanced if they go lower than past rates. Mortgage rates should only be lower than inflation if lenders believe that the inflation is very temporary or if inflation has just spiked up and they are slowly reacting
The question becomes then, what is the historical average difference between mortgage rates and inflation. Below I have generate curves for the average 30-year mortgage rate, inflation rate, and the delta between them by year. History (since 1971) suggests that the average between the 30-year mortgage rate and inflation is ~4%, or if we look since just 2010, it has been ~3% in what have been historically low inflationary years.
The average 30-year mortgage rate since 1971 has been about 7.8%. If the mortgage rates return to the average of 7.8% or inflation or worse, what happens if it goes to inflation +4% and how much a person can afford is highly affected by the mortgage rate? This would suggest there is a home price bubble.
The mortgage rate highly affects how much “home a person can afford” (typically 2x to 2.5x gross income) for all but the very wealthy. If mortgage rates go up by 2x (which is what they should do with 4-5% inflation, not even the latest 7%), most people could afford to pay nearly half as much for a house. It would, in turn, result in a severe drop in house prices, a house price bubble.
Conclusion – Not a Rational Market
Currently, the federal government, via Fannie Mae, appears to be subsidizing mortgages by buying them back from lenders at low-interest rates to keep the lenders’ rates low. Fannie Mae has historically been driven by politics, perhaps more so than economics. Politically, the federal government wants to believe the current high inflation is “transitory.” But at some point, things have to give if inflation stays above even 3%, no less last year’s 5% or the current 7%. If they keep leading money below inflation, they will directly fuel more inflation as people will be incentivized to borrow and buy now both for homes and everything else.
I don’t know for sure what the effect will be. But I keep hearing crazy talk when “experts” say rates could go up a quart point (0.25%) to half a point (0.5%) when the current rates are out of whack historically by more than 4%. They either expect inflation to go down rapidly, don’t understand history, or the results are politically untenable. Regardless, over time things will have to average out one way or the other.
Thanks for sharing, though I fear you are even less concerned than you should be. Inflation is nothing more than a tax. It’s an especially abhorrent one too, since it penalizes those who are responsible and prudent, and rewards the reckless and foolhardy. But putting that aside even, the lawmakers cannot help themselves from making it worse. It will be bad enough to see the value of each and every dollar become less and less, but the terrifying endgame is that they devalue the dollar to such an extent that it is no longer viewed as the reserve currency of the world. People have no idea what an advantage this has given this country over the last 100 years, and what the end of it would mean to them. None. The end of dollar hegemony will result in hardship beyond what any of the so-called experts can begin to understand. It would test the very civility of the American people. And yet the elected elite clamor for more and more and more money to buy favor and signal their virtue. They cannot help themselves from throwing fuel on the fire. I only hope that some kind of shock happens sooner rather than later. It will be painful. Very much so. But every quarter that goes by now will ensure that it is that much worse when it does inevitably end involuntarily.
An interesting chart to line up is gradual gold repatriation from the US to various countries from 2001, as well as gold theft from middle eastern countries (Iraq in ~2009) to the US. The price of gold. Population size. People staying inside during Covid and mainly buying from other countries.
The gold issue maybe may be interesting as well. Still, regardless of Covid, the 30-year home mortgage rate can’t be lower than the inflation rate for very long without the US government constantly printing money which will cause more inflation. It sets up a buy now which cheap money you can borrow now before prices rise.
What get’s me is that Bankrate (https://www.bankrate.com/mortgages/mortgage-rate-forecast/) is saying that mortgages will increase to as much as 3.5% before setting back to 3.5% by the end of 2022. If inflation stays above 4%, and currently it is 7.5%, I don’t see how this is possible and this does not even factor in that mortgages have been 3% to 4% higher than inflation. It seems to be a self-fulfilling prophecy if inflation stays over 4%.
Fed is printing money like crazy? Sure as eggs it’s Russian-Chinese interference. Join the Navy!
Hey, when a review of Lynx R1? I think of using it as a VR180 camera with LifecastVR software. Is it a good idea?