Three Things to Know About Why Mortgage Interest Rates Are on The Rise
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By Ryan Casey Stephens, FPQP®
Special Contributor
Despite many economic measures moving in the right direction, including inflation readings, mortgage interest rates are heading back up to the stratosphere. We now run the risk of high rates and housing costs ruining what could be a much-needed healthy spring market here in North Texas. That’s why today I’m not mincing words. I’m going to point out two main culprits behind the problems, as well as offer my thoughts on where there’s light at the end of this tunnel in this week’s very angsty Three Things to Know.
Housing is Not Inflationary
If you’ve followed my columns long enough you might be saying, “Yes it is! It makes up a huge chunk of some inflation reports!” Well, you’re right — but it shouldn’t be that way. One of the biggest problems with how we measure inflation is that we even track housing costs at all. Have I ruffled a feather or two yet?
According to Maslow’s hierarchy of needs, the four main things every human needs are air, water, food, and shelter. People have and will always pay whatever it takes to find safe lodging. Sadly, when groups of people live in small areas, choice housing becomes more difficult to find, and the price increases. Did you know that in the last 75 years, the percentage of Americans that live in urban areas increased from 64 percent to 83 percent? Too little housing creation in the right areas is causing a spike in the cost of rent and prices, which the Fed is measuring as inflation. It has very little to do with the inflation of the U.S. dollar, and everything to do with rapid urbanization and off-the-charts competition for housing.
Builders see today’s high inflation, high mortgage interest rates, and impending recession as a sign to pump the brakes, but we need them to do the opposite. Builders and developers, if you’re out there reading this — you are the answer. More availability of affordable homes and apartments will drive prices down and cool competition. Until we fix the fact that we measure rent and home prices against inflation, we will always need lower rent and lower prices, or we’ll never get inflation back down to the Fed’s 2 percent target.
First Thing to Know:
The Fed refuses or seems unable to acknowledge that historically low inventory and urbanization are to blame for rising housing costs — not inflation. Until a time when that’s not the case, more inventory seems the only solution.
Wall Street Punishes The Middle Class
When the average American is saving less and buried in credit card debt, we need lower interest rates. If that sounds counterintuitive to you, hear me out. It was once the case that debt was only a tool for the wealthy, and it was a liability to the common man. Figures like Dave Ramsey and his mindset grew out of this environment, but the landscape has shifted. Real estate debt, for example, is quickly becoming a better wealth creation tool than a 401(k). Mortgages, credit cards, personal loans, and small business loans create mobility for the middle class, allowing movement from town to town without the risk of starting over. Low-interest debt allows folks to safely cash flow themselves without the risks of payday or title loans. It’s the ultimate security blanket for the non-ultra-wealthy.
The Fed even believes what I’ve said is true. Just look at 2020: when millions were laid off and the economy was in shambles during the pandemic, what stimulus did the Fed protect above all else? Low interest rates. The problem is, Wall Street has a say. Because investors are so dead set on seeing the Fed pivot they shoot the average American when they don’t get their way.
Right now, inflation is down more than 3 percent from its peak, yet mortgage rates are quickly climbing back to the rates they saw during higher inflation months ago. What gives? Short answer, traders are devaluing mortgage bonds because they don’t understand the Fed, inflation, or the average American’s needs. It infuriates me, frankly, to see mortgage interest rates forced higher by nervous desk jockeys in New York when inflation remains flat and is heading in the right direction.
Second Thing to Know:
The flow of money in and out of mortgage bonds doesn’t work for the average person. At a time when we need more housing affordability, the system continues to ramp up mortgage costs despite cooler inflation readings.
No Mercy Until Next Month
Unfortunately, these words likely won’t fix our systemic issues, and we must face the reality that we have built around ourselves. With that in mind, the next two weeks will likely be frustrating to many of us in finance and real estate. Beginning in March, annual leases on apartments should begin to reflect slower growth and the cost of most goods will begin to reflect lower prices than last spring. With tamer inflation readings, Wall Street will again begin to believe the worst is over and hope for a Fed pivot once again. As support moves away from treasury bonds and back over to mortgage bonds, rates will ease and with it the pain currently felt by so many of us.
Third Thing to Know:
There’s no easy fix in sight. Only time will serve us in seeing mortgage interest rates begin to drop again. Hopefully it happens in time for a somewhat healthy spring market.
Ryan Casey Stephens FPQP® is a mortgage banker with Watermark Capital. You can reach him at [email protected].
