Jumbo Rates to Drop as Inflation Data Boosts Market Confidence
Thursday’s encouraging inflation data sent equity markets soaring, making future interest rate cuts almost certain by September and no later than November. For those in real estate and mortgage origination, the 4.65% to 4.45% drop in the 2-year Treasury is significant and should result in numerous banks lowering jumbo interest rates next week. Conforming and government loan products are also enjoying better pricing. The combination of reduced inflation, rising unemployment, and stalling consumer confidence, is helping to lower yields on the longer end of the yield curve.
While the CPI print was well-received by the markets, PPI (or wholesale inflation) surprised a bit to the upside, suggesting that inflation is not dead and could reaccelerate later in the year. Of importance in the CPI reading was the attention paid to the owner’s equivalent rent, a lagging indicator and a main component of CPI. Although this reading came in soft, the indicator lags by 12-18 months, and there are many other signs that rents are starting to rise. Finally, huge deficits, geopolitical tensions, and massive spending all support the notion that inflation may not return to the 2% target. The United States and the free market economy have historically benefited from a complex and uncertain world, lowering bond yields.
Real estate experts are beginning to agree with an idea we shared a while back: if interest rates fall, inventory may rise. As a result, lower interest rates may lead to lower prices and increased activity as buyers have more property options, contrary to what we have all been taught. Since COVID-19, many economic principles have not made sense. Here are just a few thoughts:
• Higher rates for longer should have led to a lower stock market.
• Higher rates for longer should have led to lower housing prices.
• Commercial property defaults should have crippled regional banks by now.
• High Fed Funds should have seen inflation drop more than it has by now.
• An inverted yield curve is an ominous sign of recession.
None of this has happened. For housing, the longer people stay in their homes, the more inventory builds up. For those in real estate who can survive to 2025, there are signs that the overall residential market is getting much busier. This would be a welcome sign for us all.
