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Interest Rates Likely to Get Worse | WMU 3.12.21

Jerome Powell acting as a super hero
Mar 12, 2021 03:24 PM

By: Kyle Bergquist

Interest Rates

Per Bankrate’s survey of large lenders, the 30 year mortgage interest rate on purchases rose slightly this past week to 3.23%, with .33 in discount and origination points.

According to Bankrate, rates have fallen .65% since their 52 week high of 3.88%

(That’s a savings of $182.07 per month on a $500,000 loan!)

Mortgage Interest Rates breakdown graph (1)

 

Kyle’s Quick Take – Rates are going to get worse, before they get better

Large institutions, endowments, organizations, WHOEVER will park money in Treasury Bills and Mortgage Backed Securities as a way to stay ahead of inflation at relatively low risk.  The problem with this is that when inflation fears grow, all those institutions, endowments, organizations, WHOEVER will bid yields higher as a way to maintain their margin over inflation.  For example, if they’re expecting 1% inflation and they want a 2% margin over that, they’ll bid yields (or mortgage interest rates) to be around 3% in the mortgage markets.  However, if inflation expectations rise to 2%, then all those institutions, endowments, etc will bid yields to be 4% to maintain their 2% margin…thus increasing mortgage interest rates to homebuyers. 

Interest rates have been rising on inflation fears since Presidents Day, 2021.  According to Bankrate.com, rates are .3% higher than their 52 week low from a month or so ago.  Unfortunately, moving forward, inflation news is going to get worse, which means mortgage interest rates are likely going to continue rising in the short and medium runs here.  The reason inflation news is going to get worse…  Well, let me defer to my favorite Bow-Tie Economist Elliot Eisenberg.  Elliot states:  A year ago today, the WHO declared Sars-CoV-2 a global pandemic. Lockdowns commenced and prices of many goods and services collapsed, airline tickets, clothes, oil, as examples, and M-o-M inflation readings went negative in March, April, and May [of 2020]. Comparing those pandemic-induced prices to what they are now will soon show year-over-year inflation rates exceeding 3%/year. IGNORE IT! These Base Effects are one-off and indicate nothing about current inflationary pressures.

The problem is:  The market don’t care.  Thus, inflation data is about to get worse here in the next few months = expect mortgage interest rates to rise. 

Jerome Powell is a Superhero and he’s literally spent Trillions keeping rates as low as they are, but inflation is his Kryptonite, and we’re just gonna have to ride this out for a little bit here. 

The Puget Sound Real Estate Market

Puget Sound Real Estate:  Charts and Data

Alex Black Absorption Rates per NWMLS Real Time Data

Absorption Rate is calculated as:  (Pending Sales) / (Active + Pending Sales)

SFR in Seattle

  • SFR Pending Sales in Seattle:  883 homes
  • SFR Active Listings in Seattle:  500 homes  
  • Absorption Rate for SFR in Seattle:  63.85%
    • Competition is driving prices higher…already about $45,000 higher since our winter low.  So long as the absorption rate can stay high, escalation clauses will likely keep pushing prices even higher than where we’re at today in the weeks to come.   

Absorption Rate for SFR graph

Condos in Seattle

  • Condo Pending Sales in Seattle:  291 condos
  • Condo Active Listings in Seattle:  597 condos
  • Absorption Rate for Condos in Seattle:  32.77%  
    • A relatively high absorption rate gave us a strong floor for median condo prices to jump higher.  So long as the absorption rate can stay strong, escalation clauses will likely keep pushing prices even higher than where we’re at today in the weeks to come.  

Absorption Rate for Condos graph

Seattle SFR Stats breakdown Seattle Condo Stats breakdown

 

Median List Price graph

Price Per Square foot graph

Inventory graph

Average Days on Market graph

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