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How High Will Rates Go Before Falling? What Will Be The Catalyst?

How High Will Rates Go Before Falling? What Will Be The Catalyst?“The 10 Year Treasury yield will be north of 4% by the end of the year.”

So says Joseph Wang, a former Federal Reserve insider and monetary expert, who was on today’s Forward Guidance Podcast.

The 10 Year Treasury yield is around 2.6% as of the writing of this blog.

10 Year yields dipped as low as 0.5% in 2020 and hovered in the mid 1% range for most of 2021, as shown in this chart.

MORTGAGE RATES ABOUT 2% HIGHER THAN 10 YEAR YIELDS

This excellent article explains the relationship between the 10 Year yield and mortgage rates.

Mortgage rates tend to be about 2% higher than 10 Year yields – although they don’t often move in unison, as I explained in this recent blog and as the article explains as well.

Mortgage rates are higher because mortgages are less liquid and more risky from a default and a prepayment perspective (investors don’t want to have their investments paid off unexpectedly when borrowers sell homes or refinance).

AVERAGE MORTGAGE RATE IS 5% TODAY

This chart shows average mortgage rates over time, and says that the average rate today is about 5% (about 2.4% higher than the 10 Year yield).

MORTGAGE RATES 6%+ BY YEAR END

If 10 Year yields climb to 4% by year end, as Mr. Wang predicts, it stands to reason that mortgage rates will climb another 1% to 1.5% by year end.

This would put mortgage rates in the 6% to 6.5% range.

$500,000 LOAN AT 6% VS 3%

A $500,000 loan at 3% has a $2,108 payment; a $500,000 loan at 6% has a $2,998 payment.

That is about a $900 difference, and yes, that could well impact affordability and demand and impact home prices (although we are still seeing housing appreciation despite the 2% rate increase we have endured over the last several months).

WHAT WOULD CAUSE THE FED TO QUICKLY REVERSE COURSE?

According to Mr. Wang, a 1,000 point drop in the Dow Jones Index (currently around 34,000) in a single day, or a very fast increase in bond yields (as much as 1% or more per day, vs the 1/8% to 1/4% we have been seeing).

Other pundits are saying that a 10% to 20% decline in the stock market over a period of weeks or a few months will cause the Fed to reverse course.

JOSEPH WANG AND JEFF SNIDER DISAGREE

I need to point out finally that Joseph Wang and Jeff Snider of Alhambra Partners (who I cite often in this blog) disagree with each other.

Mr. Wang believes the Fed is all powerful, and Mr. Snider thinks the broader “Euro Dollar” market is so vast that it, and investors overall, are much more powerful than the Fed – and that the bond market only reacts to the Fed’s comments and actions in the short run. Snider also believes that the Fed is almost always wrong with its assessments and that it will have to reverse course sooner than many expect.

This recent Forward Guidance podcast features a wonderful (and very friendly) debate between Snider and Wang.

As I repeat often, we all have front-row seats to watch who will be right over the next few years.

But – if Wang is right and we see 6%+ rates, I suspect we will survive in light of the fact that we are doing just fine with 5% rates right now.

Jay Voorhees
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167