We are certainly in unusual times. One of the great joys of my job is speaking to people on a daily basis who are much smarter than me. While I understand why the housing market and equities markets have soared during the worst economic period since the Great Depression, it is not at all what I would have thought would have happened. Some great minds also remain perplexed by these events but chalk it up to massive synchronized central bank stimulus, artificially low rates, and transfer payments which have kept consumers spending. What scares the “smart money” is what could derail this momentum, and the most common answer is inflation.
When and if inflation pops the bubble is anyone’s guess, but with another $1.9 trillion stimulus package promised by President-elect Biden, we are reaching debt levels that are a bit scary. We understand why this needs to be done so we are not arguing against more stimulus, but we are worried about the repercussions long-term of all of this money printing.
With that thought in mind, our focus at Insignia Mortgage is how does all of this affect the mortgage market. Our feeling is that interest rates have seen the lows and that rates will gradually rise. The Fed is encouraging inflation while also telling us that they will control interest rates if rates move up too far. This relationship will work for some time, but should the combination of vaccine (we should have 4 vaccines by end of March) and herd immunity get our economy fully re-opened, I see no reason why interest rate benchmarks such as the 10-year Treasury note will remain at 1%. The one outlier is if the virus mutates and current vaccines become ineffective (to date the U.K mutation is not worrisome but the South African mutation is creating some concern), all bets are off. We hope for all of us that this scenario does not pay out.
Regarding individual loan transactions, we are biased toward locking-in rates which are at historical lows. The need for business has kept lenders working off of tight net interest margins which has helped affordability greatly as house prices have gone up fairly dramatically in some areas. Even if interest rates drop, many lenders have placed floors on the rates. Overall, our lending sources remain committed to making deals work and are doing all they can to help our clients during these tough times.