Mortgage rates likely to remain below 4%

I read US inflation better than forecast , written by a distinguished foreign currency analyst, with some surprise. For most of us who are “ripe in years” the challenge for most of our lives has been to prevent inflation from growing too rapidly. But now, the challenge through most of the world is to encourage inflation, which is deemed to be too low. Thus “better than forecast” on inflation now means a higher rate than expected.

What’s all this doing on a real estate blog, you may be asking. The answer, of course, is that mortgage rates are based on the yield on 10 year Treasuries, and those in turn reflect the expectation for interest rates, which are influenced by expectations for economic growth and inflation.

Higher economic growth normally leads to higher prices (inflation) because it becomes easier to pass on price increases. This economic recovery, such as it has been, has taken place to a background of falling commodity prices and little or no growth in wages because of high levels of unemployment or underemployment. And many countries have tried to encourage inflation by adopting a policy of easy and cheap finance.

Commentators – and the Federal Reserve itself – talk of the desire to return to “normalized” interest rates, but this ignores the question of whether the norm has changed. I am in the camp which believes that it has.

And we now learn that the San Francisco Fed, home of Fed Chair Janet Yellen, in a recent paper  has suggested that the natural rate of interest rates may currently be negative, which in turn suggests that our ultra low rates may not actually be stimulative at all.

“Monetary conditions remain relatively tight despite the near-zero federal funds rate, which in turn is keeping economic activity below potential and inflation below target,” writes economist Vasco Curdia.

The insight centers around the concept of a natural rate of interest. This is the hypothetical interest rate at which money would be lent and borrowed in equilibrium, leading the economy to neither grow nor shrink. If actual interest rates are above this natural (or neutral) rate, then less money will be lent out than otherwise might be, leading economic growth to slow. Conversely, if actual interest rates are below this neutral rate, then economic expansion should result.

Source: FRBSF

Source: FRBSF

And according to Curdia, the neutral rate is currently below zero. Actually, he says it is currently at negative 2.1 percent, in contrast to a long-run level of 2.1 percent. If he’s correct, the direct implication is that right now, even a federal funds rate target of 0 percent to 0.25 percent is high enough to slow down the economy rather than contribute to expansion.

And with 4 Fed Members talking this week of not raising rates soon, the outlook is that mortgage rates will remain below 4% for the forseeable future.

If you – or somebody you know – are considering buying or selling a home and have questions about the market and/or current home prices, feel free to contact me on 617.834.8205 or Andrew.Oliver@SothebysRealty.com.

Read Which broker should sell my home?

Andrew Oliver is a Realtor with Harborside Sotheby’s International Realty. Each Office Is Independently Owned and Operated

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