Record-low mortgage rates make little sense – Daily News

on Jan12
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“Bubble Watch” digs into trends that may indicate economic and/or housing market troubles ahead.

Buzz: A widely watched 10-year Treasury rate started the new year by jumping to a 10-month high. That upswing suggests that mortgage rates — which oddly fell to another record low — could soon turn higher and become a big drag on homebuying.

Source: The Federal Reserve’s “constant maturity” 10-year bond yield measurement vs. Freddie Mac’s average 30-year fixed mortgage rate.

The Trend

In the week ending Jan. 8, the 10-year bond rate continued its late 2020 surge by hitting 1% — up from last year’s low of 0.55% in August. This is the highest 10-year rate since March when the coronavirus began wreaking health and economic havoc.

The mortgage benchmark started the new year by falling to 2.65% — the 17th record low set since the pandemic upended the economy. Curiously, rates are down from 2.88% in August when the 10-year rate bottomed.

The Dissection

There’s no doubt the economy and housing last year needed a tonic of historically cheap money as efforts to stem the spread of coronavirus throttled the economy.

Forget all the debate over various stimulus programs — direct checks to citizens, extra unemployment benefits and business grants and loans — a huge factor in the economic rebound has been the Fed’s efforts to push the cost of lending down. Central bankers cut the rates they control while also buying debts in financial markets, including more than $2 trillion in mortgages.

Add in regulators’ generous financial safety nets created for borrowers who can’t make house payments and you have what adds up to a huge housing bailout.

And it’s working. Just look at homebuying in California.

Despite unemployment hitting record highs amid strict pandemic business limitations, November’s statewide median selling price for a single-family home jumped 18.5% in a year to $699,000. That’s the biggest gain in nearly seven years.

And soaring prices didn’t deter house hunters who boosted sales 26% in the year, the biggest increase in 11-plus years.

But as 2021 starts, there seems to be a disconnect between the relative upbeat thinking of financial markets (look at the rising 10-year yield) vs. the dour outlook of the Fed (look at cheaper mortgages). Remember, interest rates move opposite of economic progress — rates typically rise during improving economies and fall when things look worrisome to bleak.

So we’re living through a rate rarity, if not a touch of insanity. Since 1980, when the 10-year Treasury rate rose over a five-month period, mortgages fell just 8% of the time. And over those 40 years, record lows were set after bond yields were rising just 3% of the time.

Yes, the pandemic era is a one-of-a-kind headache, economically speaking. Keeping mortgage rates low to boost homebuying makes sense as it’s an economic niche that can help the economy pull out of a funk.

But have the central bankers provided too much housing help?

Last year’s cascading rates gave the typical house hunter 14% more buying power for each dollar of house payment. It’s spurred a buying frenzy but at a time when most owners don’t want to sell for financial and/or health reasons.

Yes, the Fed has promised it will keep rates low for the extended future. Yet one wonders if home values are beginning to look a tad overheated.

For example, Attom Data Solutions says homebuying “affordability” at year-end ran below historical norms in 55% percent of U.S. counties. That’s up from 43% a year ago and 33% three years ago.

How bubbly?

On a scale of zero bubbles (no bubble here) to five bubbles (five-alarm warning) … FIVE BUBBLES!

The Fed missed foreseeing the bubble of the mid-2000s. Their cheap money may have created one in this pandemic era.

Let’s believe that lenders and borrowers are making rational use of their money. No funny loans to people with limited income in this cycle, thankfully.

But if the economy continues to slowly improve, that should translate to pricier mortgages. Please recall that in late 2018 and early 2019, mortgage rates jumped — reaching 4.94% at one point — and swiftly chilled homebuying.

It’s inevitable that home values will be pressured as borrowing power gets slashed as borrowing becomes more expensive. Ponder the impact of potential increases from the 2.65% average rate that started 2021 …

  • Up a half-point to 3.15% — those were rates back in May — cuts buying power by 6%.
  • Up a full point to 3.65% — March 2020’s level — cuts buying power by 12%.
  • Up 1.5 points to 4.15% — May 2019’s level — cuts buying power by 17%.
  • And a 2-point increase to 4.65% — still under the 2018-19 high — cuts buying power by 22%.


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