Here is my bold prediction for mortgage rates in 2021: They will go up and down.
You can take that to the bank!
OK – here’s a more specific prediction – they will edge up about 1/2 percent before coming down again to where they are now or even lower.
This is from rate-guru, Barry Habib, who was featured again in The National Real Estate Place’s short video yesterday.
I frequently quote Habib, the founder of the MBS Highway and frequent financial news commentator, b/c his predictions prove more accurate than almost all of the other commentators I follow.
And, I follow many, including the many “experts” featured in the Goldman Sachs, Grant’s Interest Rate Observer, Investors, Masters in Business, Planet Money, Hidden Forces, and Jolly Swagman podcasts.
Nobody comes close to matching Habib’s accuracy when it comes to mortgage rates.
INFLATION MOVES INTEREST RATES
What is particularly interesting this time is Habib’s focus on what is moving rates currently: Inflation.
There are many causes of inflation including:
- Excess demand, like what we’re seeing with housing right now.
- Insufficient supply, like what we saw with the oil shocks in the 1970s.
- Increased supply costs, like what we saw as a result of oil supply shocks in the 1970s, as higher petroleum costs spilled over into other products.
- The creation of too much money, like we are seeing in Venezuela, Zimbabwe, and Argentina now, and like we saw with the U.S. in the 1970s as well.
What has been very surprising to most inflation watchers over the last 20 to 30 years is how reduced supply costs have kept inflation in check.
A combination of vastly improved technology, falling oil prices, much cheaper transportation costs, access to much cheaper labor markets across the world, and far more efficient supply chain management has kept prices down in a manner that has caught most everyone off guard.
Anyway, Habib focused entirely on inflation yesterday, pointing out that there has been upward pressure on rates lately b/c of inflation signals.
Habib believes our current inflation signals are a result of increased supply costs that in turn are a result of “broken supply chains” b/c of the COVID crisis.
In other words, COVID disruptions are making it difficult for manufacturers and retailers to source items as cheaply as they could before.
Habib thinks that this inflation will push mortgage rates up as much as 1/2 percent over the next few months, despite the Fed’s efforts to keep mortgage rates down, as discussed in Wednesday’s blog.
Here is the huge irony: Habib thinks rates will drop once the vaccine is in place. This is ironic b/c one would think that such “good news” would foster the type of exuberance that would move investors out of bonds and into stocks, and thus push rates up (as discussed Wednesday).
But, Habib’s point was that a vaccine will free up supply chains so much that costs will again plummet and tame inflation, and thus bring rates back down (b/c inflation is the biggest influencer of rates right now).
Habib apparently does not believe that all of the “money creation” by the Fed right now will result in inflation, and I can guess as to why: A lack of “velocity” or how often a unit of currency turns over in an economy, e.g. consumer gets her hair done and pays stylist; hair stylist spends that money at the florist; florist spends that money at the shoe store; shoe store owner spends that money at the grocery store; and so on…
“Velocity” remains too low when consumers are not spending enough, when businesses are not investing enough, or when banks are not lending enough. But, until velocity returns to normal or at least increases, the creation of money by the Fed does not appear to be a major inflation threat.
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