Prudent Advice on Housing and Mortgage Rates

One of the most difficult aspects of discussing bond yields, mortgage rates and housing is separating the logic of what is likely to occur from the pragmatic issues each of must deal with individually.

In this column, I am going to deal only with the pragmatic issues.

Interest rates, bond yields and mortgage rates are near all-time lows but above where they were last year.  In real terms, many yields are still negative, however, and this is helping to suppress mortgage rates. Although it is possible, and in my opinion probable, that mortgage rates and home values decline further in both nominal and real terms before a secular resurgence in economic activity drives them both upward, this process could take years and be interrupted by cyclical surges in both.

In order for yields and mortgage rates to decline below last year's lows, not only does the U.S. economy have to slow and probably move into recession, the same must occur simultaneously in Japan and in the core of Europe. There would also have to be simultaneous monetary stimulus in each of these areas in order for their respective sovereign yield curves to begin to move toward parity, as I discussed last November.

Since then, the U.S. Federal Reserve announced QE4 in December, and the Bank of Japan has decided to finally step in with its own aggressive monetary stimulus. The European Central Bank, however, is not being as aggressive and is still showing an affinity for austerity. I believe that the ECB will eventually join the aggressive stimulus group and that policy from all three central banks will become more aggressive and drive down sovereign bond yields globally and pull mortgage rates down as a result.

This process could take a few years of failed cyclical economic rebounds before the necessity is acknowledged by all. And of course, most germane to the pragmatic issues I'm discussing here, I could be wrong, and the worst of the post-2008 global hangover may be behind us.

If that is indeed true, it presents another sobering issue for homeowners and for those who are interested in becoming homeowners.

If the U.S. and global economies have already bottomed, are beginning to stabilize and are in the nascent stages of an increase in confidence, consumption and lending, then instead of competitive or coordinated currency depreciations between the U.S., Europe (Germany), and Japan, we may be near a fulcrum in policy that will see central banks removing stimulus rather than increasing it.

The reaction of the bond markets in particular to the minutes of last December's Fed meeting reflect investors' worries about this occurring.

If that concern begins to get validated by economic reports, especially reports of increases in bank lending, then yields and mortgage rates will begin to rise, even if we see only a cyclical rebound in activity, though the process could take a few years to complete and reverse. In the meantime, we're likely to see bond yields and mortgage rates rising by 100 basis points within a year and in fits and starts.   

The bottom line is that the U.S. is very near the point maximum total affordability of housing. Mortgage rates are low, housing prices as a percentage of income are very low, and access to mortgage capital is increasing.

Although this situation may continue for two to five years, it also may not. The best advice I can offer anyone right now with respect to a primary residence is that if you can buy, then do so. If you are considering a refinance and if the cost of doing so can be recouped by monthly interest savings within no more than 18 months, then do so.

Don't get caught in myopia of housing values right now, or mortgage rates right now, or economic activity, or whatever. At some point the affordability of housing is going to begin to decrease, and when it does, that situation will likely last for a generation or more.