Mortgages vs. the Expected Inflation Rate, April '18

April 23rd, 2018 by 

Inflation expectations through Treasury breakevens – a concept we just visited – are a decent take on the market's opinion on the 'cost of holding money'. Mortgages are, of course, the standard means by which people acquire houses - usually borrowing money for 30 years to pay off the cost of a home (see some mortgage history here). One interesting perspective is to compare what a mortgage 'costs' in rate versus inflation to see how much of a deal a mortgage is compared to cash.

Comparing Mortgages vs. Breakeven CPIs

Nominally, the 30-year breakeven would be the comparable rate to a 30-year mortgage - but reality intervenes!

One apocryphal stat that used to make the rounds was the average 30-year mortgage lasts around 7 years. Dubious veracity, sure - but buying a new home or refinancing does turn mortgages over. Let's build on the urban myth (if you have a source, we're all ears) and call it 10 years.

Here are 10 year Treasury breakevens and 10-year constant Treasury maturity rates mashed up with the venerable 30-year mortgage rate:

Mortgages vs. 10 year Breakeven rate, April 2018

And, the punchline: compared to a baseline of 10 year Treasury breakevens... mortgages are a slightly worse deal to where they were starting in 2013. You're paying about a 2.36% premium over 'expected' CPI to hold a 30-year mortgage for 10 years.

Mortgage Premium over 10Y-B30 Year Mortgage10 Year Constant Maturity Rate
Last Reading2.33%4.47%2.92%

Increasing Mortgage Rate – and Inflation Expectations

It's a common theme in many cities - homes are quite expensive to purchase. For most purchasers, the 'cost' of a home is the product of the house purchase price and the affordability of a mortgage. The 30-year mortgage rate is now sitting a full percentage point above the lows it touched in 2013 - it was around 3 and a half percent for a 30-year.

We may never see those rates again... coming as they did during a period of low (or negative!) inflation expectations and a low spread. Still, mortgages are a decent deal – one thing considered – by this quick cut.

Is this the be all and end all of mortgage affordability measures? Certainly not - and this cut doesn't tell you anything about purchase price (we'll fix that soon). However, we like this framing - "what does the market demand on top of a safe inflation-adjusted investment"?

What measures do you use to look at mortgage and housing cost? Anything interesting you see in the data? Have a lead on 'average mortgage length' for us?



PK started DQYDJ in 2009 to research and discuss finance and investing and help answer financial questions. He's expanded DQYDJ to build visualizations, calculators, and interactive tools.

PK lives in New Hampshire with his wife, kids, and dog.

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