With the swearing-in of President Joseph R. Biden, a new administration takes the reigns from a most unusual four years. Treasury Secretary Janet Yellen didn’t hold back with her comments to “go big” on stimulus and assistance payments as the country continues to grapple with the coronavirus. Mass vaccination rollouts seem to be picking up steam which is a welcome sign as we all yearn to go back to a normal life. However, there will be some resistance from Congress to pump in another $1.9 trillion in stimulus as $900 billion was just committed not too long ago and has yet to make its way through the economy.
Fourth-quarter bank earnings were strong overall and reserves for bad loans revised downward. These are all good signs. The yield curve has steepened as well, which will help banks earn more money on loan production. Housing sales remain on fire as people flee big cities for the suburbs or realize the need for a bigger home. Tech earnings from bellwethers IBM and Intel disappointed on Friday, which hurt equities. Interest rates remain over 1% on the 10-year Treasury. As we have stated previously, a 10-year Treasury at 1% is very attractive, and with the Fed encouraging inflation, borrowers are in a position where long-term mortgage financing can run negative versus inflation. For example, if a new mortgage is originated at a 2.75% note rate, but inflation is 3%, the borrower’s real interest rate is -.25%. As wages rise, the borrower will continue to pay the mortgage with inflated dollars, which increases affordability and also consumer spending as more dollars are available to buy other goods and services. Inflation should also help increase the value of the real estate asset, which adds additional consumer confidence.
With this thought in mind, no one knows for sure if inflation will run hot. It has not for over two decades. Many economists are worried about inflation, especially after the unprecedented amount of debt taken out by central banks in response to the pandemic. Our belief is that it’s likelier for rates to move higher than lower, so we continue to encourage borrowers to take advantage of these low interest rates and use this ultra-accommodative environment to refinance into long terms mortgages, or to lock-up a new purchase.
