February 2021 – The Interest Rate Arsonist
In 2020, 30-year mortgage rates declined from 3.45% to 2.67%. This means for a $500,000 house, 20% down-payment, and 30-year fixed mortgage, the monthly payment declined from $2068 to $1899. To think about this another way, someone borrowing at 2.67% could spend $550,000 and end up with the same $2068 monthly payment. The decline in interest rates enables housing prices to push 10% higher while monthly payments stay constant.
Home Prices Love Low Rates
Using the latest Case-Shiller U.S. National Home Price Index data, home prices did just that – they rose about 9% in the 12 months ended November 2020. Declining rates enable buyers to afford higher prices without increasing their potential monthly mortgage payments.
Rates are Increasing in 2021
What happens when rates increase? In 2021 the interest rate on the U.S. 10-Year Treasury Bond has increased from 0.93% to 1.30% today. That’s an increase of 40%! On Bankrate.com, national 30-year fixed rate mortgages are currently around 3.04%. This means, in the above example, to keep the $2000 monthly payment, buyers can now only afford to pay $525,000. This is a decrease of 4.5% on the price of the house.
Rates Burn Houses Down
Rising rates are a mixed-bag for the U.S. economy. Investors may cheer “reflation” but for consumers that rely on debt for purchases of homes, cars, and college educations, rising rates are painful! As these purchases are the largest most consumers make, you can see how rising rates could be disastrous for consumer spending.
We are monitoring the US Federal Reserve for signs of pain from higher rates. It is our expectation that both reflation and higher rates are temporary, but massive stimulus and infrastscture spending from the Federal government have the ability to force the Fed to implement yield curve control (YCC.) YCC is forced lowering of long-term rates in order to keep consumers spending.