Mortgages vs. Inflation: The Real Mortgage Rate is Historically Low...

September 5th, 2020 by 

As we occasionally point out here at Don't Quit Your Day Job, inflation expectations are an interesting indicator that can be calculated from market data. They become even more interesting when we combine them with other measures. It becomes yet more interesting if you are in the market to refinance a mortgage or purchase a home. Read on for an interactive chart on the 30 year mortgage and the market's 10-year inflation expectations. And yes, if you are in a reader, you should click through to see the chart)

If you are in a position to buy or refinance, (or not but still interested!) we'd like to share with you some number crunching we have done on mortgages. We took the market's 10-year inflation expectations as estimated by the Cleveland Fed and crossed them with the 30-year mortgage rates reported by the St. Louis Fed. If you're looking for a mortgage today, note that mortgages are showing a historically (ahem, since 1982) small gap between the market's inflation expectation and the 30-year mortgage rate. The implication? As of October, banks are willing to capture the 2.67% percentage point delta between the 30 year rate and the 10 year expected inflation rate.

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Why 10 Year Inflation Expectations?  Why not 30?

Anecdotally, we've heard that most people buy a new house or refinance in 6 years, so 30-year mortgages aren't expected to be carried to maturity.  It's impossible to say what the right look-ahead period is... we could use 6 years on that magic number, or we could try to figure out an average turnover from existing home sales and mortgage originations.  Let's call it 10 years.  You can go to the Cleveland Fed site if you want to try a different look-ahead period (they have 1 year - 30 years).


Just because the gap is low doesn't mean it won't go lower - so keep that in mind before you lock in a new rate. The convergence of the three measures is a sight to behold for people in a position to buy a house or refinance, however.  If you do lock in a rate under these conditions, you will be doing it under the best mortgage conditions in the last 29 years.  DQYDJ isn't ready to completely declare housing recovered, but also note that house prices are falling as well.  Check out our Real Estate calculators if you want to run some numbers on your situation. Oh yeah, comment!

Don't Quit Your Day Job...

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