For the first time ever, mortgage rates plunge as inflation soars

Mortgage rates have not moved up even though inflation hit 6.2% last month, a three-decade high.

By Jeff Lazerson | jlazerson@mortgagegrader.com | MortgageGrader.com | November 14, 2021

Contradiction? Kerfuffle? Chaos?

Freddie Mac’s 30-year fixed plunged 11 basis points to 2.98% this week, even as the nation’s inflation rate jumped to 6.2%.

When was the last time this happened? Exactly never.

Traditionally, mortgage rates move up with inflation, says Richard Green, director of USC’s Lusk Center for Real Estate.

“This has happened at no other time in history,” Green said. “We are living in a world of uncertainty.”

The yield for the 10-year Treasury Inflation-Protected Securities, or TIPS, was at an all-time low price of negative .57, Green observed. TIPS are indexed to inflation to protect investors from a decline in the purchasing power of their money, according to Investopedia.

This is the lowest Freddie’s rates have been since Sept. 23.

It’s important to note Freddie’s 30-year weekly rate survey was completed prior to the Labor Department’s Wednesday inflation announcement, and rates could bounce back up. For example, the 10-year Treasury rate — which the 30-year fixed closely follows — jumped 10 basis points to 1.56% after the Labor Department’s announcement.

So, how did mortgage rates manage to go down again with price inflation all around us?

The world is awash with cash, which is holding down mortgage rates, said Mark Vitner, senior economist at Wells Fargo Bank.

“The U.S. government has spent $5.4 trillion since the beginning of the pandemic. The Fed has added $4.3 trillion to its balance sheet,” Vitner said. “(U.S. households) have $2.3 trillion in excess savings. And the U.S. acts as an anchor, pulling in money from overseas as (investment returns) are so low overseas.”

Inflation pressures are demand driven, experts say. As we return to normalcy, consumers want goods, but the shelves are empty. Experts differ, however, as to whether this is transitory inflation or whether this is going to be around for a long time.

When COVID-19 hit the world sort of stopped. And it wasn’t just manufacturing.

“States haven’t issued truck driver’s licenses in the last few years,” said Ted Tozer, senior fellow at the Milken Institute of Housing Policy and former Ginnie Mae president for seven years under President Obama. “The supply chain problem is like a traffic jam trying to get flowing again.”

Vitner thinks we are currently at the peak of supply disruption, although supply issues “will dog the economy until the middle of the decade,” he said.

The number of workers in the supply chain may improve to about 3 million jobs over the next six months, said Tendayi Kapfidze, U.S. Bank’s head of economic analysis. He pointed to last week’s report that the U.S. labor force grew by 500,000 jobs.

Will mortgage rates continue to stay under control or will they go up, up and away with inflation trends?

“It would not be an absurd notion to think rates might fall a little bit,” said Jacob Channel, senior economist at Lending Tree. But rates eventually will go back up. Channel sees mortgage rates rising to the 3-4% range next year.

Tozer thinks there’s a delicate dance ahead as the Federal Reserve starts tapering its pandemic-era bond-buying program. The Fed has been purchasing $120 billion of treasury bonds per month, including $40 billion in mortgage securities.

“The key is how much tapering will trigger higher rates,” said Tozer. The next question is how will government borrowing affect inflation? “Deficit spending could trigger mortgage rates to go up.”

Will you lose your ginormous run-up in home appreciation? Will home prices pop?

Mortgage underwriting standards remain stringent since the Great Recession and the mortgage meltdown days.

“Credit underwriting has been so strict it’s hard to see a bubble,” said Vitner.

What’s the next shoe to drop?

“It’s really murky right now,” said Kapfidze said.

Freddie Mac rate news: The 30-year fixed rate averaged 2.98%, 11 basis points lower than last week. The 15-year fixed rate averaged 2.27%, 8 basis points lower than last week.

The Mortgage Bankers Association reported a 5.5% increase in mortgage application volume from the previous week.

Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $625,000 loan, last year’s payment was $47 less than this week’s payment of $2,628.

What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages without points: A 30-year FHA at 2.375%, a 15-year conventional at 2.375%, a 30-year conventional at 2.82%, a 15-year conventional high-balance ($625,000 to $822,375) at 2.375%, a 30-year conventional high-balance at 2.69% and a 30-year fixed jumbo at 3.75%.

Eye catcher loan of the week: A 30-year FHA fixed rate at 2.75% without cost.

Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or jlazerson@mortgagegrader.com. His website is www.mortgagegrader.com.

* Specific loan program availability and requirements may vary. Please get in touch with your mortgage advisor for more information.