Private Property
 

ARE INFLATION AND INCREASING MORTGAGE RATES DAMPENING DEMAND AS DISPOSABLE INCOME ERODES?

April 22, 2022

Faster inflation and strong U.S. economic growth are sending the 10-year U.S. Treasury rate up. The 10-year Treasury is now above 3 percent — the highest since 2018. 


Historically, the 10-year yield is also as a proxy for mortgage rates. 


Meanwhile, the Federal Reserve raised its target federal funds rate by a half point in May — the largest increase in the benchmark in more than 20 years.


At the same time, the country is seeing runaway inflation, further exacerbated by the Russia-Ukraine war. 


These factors combined are raising concerns that consumer demand will fall, placing a damper on economic growth. There are also fears that the Federal Reserve’s plan to continue hiking its own funds rate and tightening monetary policy could tip the economy into a recession.


As a result, investors have been selling out of bonds, which pushes yields higher, as they have an inverse relationship.


One consequence of rising yields is higher borrowing costs on debt, such as consumer loans and mortgages. After a period of record demand for housing and inadequate inventory to satisfy that demand, the question now is whether inflation will lessen demand as it erodes disposable income.


According to the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending April 15, 2022, mortgage applications decreased 5.0 percent from one week earlier.


However, data published on May 4, 2022, showed that mortgage application volume inched up in the previous week. Further, the composite index rose 2.5% from the week before. The purchase index climbed 4.1%, while the refinance index was little changed, rising only 0.2%. Refinancing volume remains 68.1% below levels from a year ago, in response to swiftly rising mortgage rates. Contract rates for fixed-rate 30-year mortgages were little changed during this week, dropping 1 basis point from 5.37% to 5.36%.


On May 09, 2022, the average rate for a 30-year fixed mortgage increased to 5.54%, up 13 basis points since the previous week — the highest in over a decade.


In April, Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting, commented on the storm of rapid inflation, increasing Treasury yields and higher mortgage rates.“The 30-year rate has increased 70 basis points over the past month and is 2 full percentage points higher than a year ago. The recent surge in mortgage rates has shut most borrowers out of rate/term refinances, causing the refinance index to fall for the sixth consecutive week. In a housing market facing affordability challenges and low inventory, higher rates are causing a pullback or delay in home purchase demand as well. Home purchase activity has been volatile in recent weeks and has yet to see the typical pick up for this time of the year.”


It remains to be seen if the increase in the 10-year Treasury will change underwriting policies in the marketplace. 


Freedom Financial Funds manages a private REIT and separate accounts through which it responds to the financing needs of real estate professionals seeking capital for construction, rehabilitation, repositioning, conversion or additions to commercial and residential properties in the Western United States. Freedom also offers build-to-suit financing nationally. In only five years, Freedom has executed more than $500 million in transactions and has remained steadfast throughout the CV-19 crisis. Freedom serves markets throughout the Western and Southwestern U.S. from its locations in California, Arizona, Oregon and Texas.