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Inflation is About to Go Up…Rates Will Follow

Inflation is About to Go UP.. and the Fed Will Allow It…

They actually have no choice.  It’s a mathematical equation.  Powell spoke on Friday getting in front of increased inflation saying that “inflation is set to increase, but likely temporary.  And if we see inflation rise, we will be patient.”  Okay Powell, you inquisitive man you.

When we look at inflation, we look at month over month and year over year.  Lately there has been a steady, very muted inflation level of .2 to .3% month over month for an annual number of 1.4%.  It’s been in this same range since August 2020.  But remember what happened in March and April 2020.  Inflation dropped -.1% in March and -.4% in April.  These negative numbers will affect us this March and April in two ways.  First, the annual comparison will jump up.  When you compare a .3% gain to a .2% gain last year it’s muted.  when you compare a .3% gain to a -.4% loss.. it’s significant.  Second, when those two negative numbers become older, the “unadjusted 12 month average” inflation will jump.  Remember 2nd grade math when we look at averages, we take all 12 numbers added together and divide by 12.  Those deep numbers kept the average low.  when they roll off, the average will jump up.  The Fed is expecting the inflation number to go well above 2% temporarily.

Inflation is the arch enemy of bonds!  Why?  Because bonds are a fixed income product. When the price of goods go up, the fixed income you are receiving goes down relative to those costs. The market takes that into account and now has to discount the price of those existing bonds. When the price is discounted (goes down), the associated yield (what we think of as rates) goes up.  That’s why inflation makes for an unhappy mortgage broker.

​​Unemployment is DOWN

The Jobs Report came out on Friday better then expected giving the market a welcomed lift! Unemployment fell from 6.3% to 6.2% with 379,000 jobs added for the month.  This was better than the expected 210,000 jobs.  It’s good news but not a reason to celebrate yet.  If you include those who have given up.. yes, all you Moms.. that real unemployment number is 11.1%.  Also, at a rate of 379,000 jobs added, it will take until Fall 2022 to recover from the 8.5 million fewer Americans holding jobs in February compared with a year ago.

Goldman Sachs Raises 10-year Treasury Yield Target to 1.90%

The 10-year had not broken above 1.50 since last February when 30 year fixed mortgage rates were 3.5%.  It broke 1.60% this week.  Then backed down slightly to 1.57%.  See the circled section below.. that’s the last two weeks…yikes!  We just woke up the giant and he’s not going back to sleep.  Compare this to the steadiness prior to the last 2 weeks.  Goldman Sachs raised it’s Treasury yield target on Thursday from 1.5% to 1.9% by the end of the year driven by a strong acceleration in the global recovery over the coming quarters.  I’ve read other analysts forecasting as high as 2.5% by year end.   This is not good for our buyers.   We have been spoiled.  Our clients have been spoiled and now what was a normal, even low, 3.25% rate is now comparatively high.  Your buyers might even be waiting for the rates to come back down.  

 DO NOT LET THEM WAIT!  Did it feel like I just screamed that?  I did. Show them the second chart below and where rates are headed.

  • $300,000 loan at 2.94%  $1255
  • $300,000 loan at 3.21%  $1299
  • $300,000 loan at 3.47%  $1345

For every increase in rate by .25%, it’s like adding 3% to the purchase price.  This is in addition to the 8.8% appreciation Denver is seeing per CoreLogic or the 18.75% increase in median home prices in the DMAR 11 county area.  Your buyers purchasing power is shrinking, so outside of 2 1/2 weeks ago, today is the best time to lock!

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