The new era of “higher for much longer.” The 40-year bond & mortgage bull market died in late 2020.
By Wolf Richter for WOLF STREET.
Today, Freddie Mac’s weekly measure of the average 30-year fixed mortgage rate hit a two-decade high of 7.23%. The next higher rate, 7.24%, occurred in June 2001. Beyond that single week in 2001, today’s average was the highest since 2000.
Various measures have already hit two-decade highs, including the Mortgage Bankers Association’s weekly measure, which rose to 7.31% yesterday; and the daily measure by Mortgage News Daily, which jumped to 7.49% on August 22, and currently sits at 7.37%. In response to these higher rates, applications for mortgages to purchase a home have plunged to multi-decade lows.
In terms of the housing market, 7% mortgage rates are not a problem – we’ve had them before, and much higher over the 30-year period in the 1970s through 1990s. The problem are home prices that spiked ridiculously in recent years during the Fed’s interest-rate repression; these prices are not sustainable, and we’re already seeing that in many markets.
The 40-year bond & mortgage bull markets died in 2020.
For a lot of people, these are pretty serious – as in dizzying – mortgage rates. But for people who bought homes in the 1970s through the 1990s, these rates appear to be about normal or low, compared to where rates were back then. In the 1990s, the economy worked fine with those rates.
Mortgage rates roughly run in parallel with, but above, the 10-year Treasury yield, given that the average 30-year mortgage gets paid off in less than 10 years, such as when the home is sold or when the mortgage is refinanced.
The chart below shows Freddie Mac’s measure of mortgage rates in red and the 10-year Treasury yield in green going back to the 1970s. The spike in mortgage rates out-spiked with ease the spike in the Treasury yield (more about this in a moment).
The 40-year bond bull market (rising bond prices, falling yields) peaked in August 2020, when the 10-year yield dropped to the record of low 0.5%, on the misbegotten hype about negative yields at the time.
The 40-year mortgage bull market peaked at the end of 2020 with the weekly average of the 30-year mortgage rate at the historic low of 2.65%. This being the average rate, lots of borrowers got even lower rates.
After the 40-year bond & mortgage bull markets died in 2020, the world moved on to the new era of higher inflation and higher yields and rates. And in the world of fixed incomes, higher yields translate into lower prices, which is why the bond market has remained delusional for as long as it possibly can.
Long-term Treasury market still delusional, but edges out of it.
The difference (the spread) between today’s 10-year yield and today’s measure of the 30-year mortgage rate widened to 3.0 percentage points, which – other than a few weeks since March – is the widest since the brief episode in 1986. Most of the time, the spread is between 1 and 2 percentage points.
This wide spread shows that the long-term Treasury market hasn’t fully come to grips with the new reality yet:
The mortgage market has been more realistic about the “higher for longer” theme, and that theme may have turned into “higher for a lot longer.” Mortgage rates have risen to stay well above short-term Treasury yields, and to stay above inflation.
But the Treasury market has spent 18 months believing in the Fed-pivot hype that rate cuts would be forced on the Fed by a steep recession, with lots of forever-QE to follow, or whatever. The opposite has happened: The Fed has continued to hike and may hike again, QT marches on at record pace, the economy picked up speed in Q1 and Q2, and is now showing signs of heating up further in Q3, and inflation has entered into an upswing that will build in the second half.
Unlike the mortgage market, the Treasury market hasn’t figured this out yet, and longer-term yields remain well below short-term yields, and they remain below core CPI. But even the Treasury market is ever so gradually giving up on its pivot-any-moment doctrine and is coming to grips with this new era of higher for much longer. Given where the mortgage market is today, and where the short-term Treasury market is, and where core inflation is going, the 10-year yield would be right at home in the 5% to 6% range.
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