Article By: Jim Porter – November 18, 2022
Treasury yields today are 4.5% for six months, 4.33% for two years, 3.90% for 10 years and 4.1% for 30 years. An investor can invest $10,000 and get 4.5% guaranteed by the government for six months so most will take this over a lower rate for 10 to 30 years.
An inverted yield curve like this has preceded pretty much every recession we have had over the past 70 years.
When a stock market investor is disgusted, like most of us are today, a 4.5% guaranteed yield is appealing for six months. We need institutional and individual investors to invest for the long term and companies to invest in long-term business expansion projects, like Intel is doing with its huge new microchip manufacturing plant that will create jobs and wealth, if we want our economy and the stock market to thrive.
When everyone is selling their long-term holdings and making a flight to quality to the bond market or sitting on the sidelines in cash, recessions happen, and stock markets fall, like they have in 2022, down 25%. The average rate on the 10-year Treasury bond since 1954 has been 5.6%, and since 2009 the average has been 2.3% thanks to the Fed since the Great Recession.
The raging bull 12-year run in the stock market and the crazy low mortgage rates we have seen over the past 10 years made us all comfortable and maybe even spoiled a bit. The Fed has again raised rates by 75 basis points, but the 10-year Treasury has improved, and mortgage rates have comes down a bit.
Fannie Mae is forecasting rates to be below 5% in the next year or two, and home prices to go down by only 1.5% next year. In normal times when 30-year fixed rate loans are high, we usually turn to 5-1 and 7-1 adjustable-rate mortgages because normally the adjustable-rate mortgages are lower than 30-year fixed rates.
Thanks to this inverted yield curve, adjustable-rate mortgages today are the same as 30-year fixed loans.
Remember, folks, most mortgages have no prepayment penalty so if you buy a house today in this buyer’s market, you can always refinance to the lower rates coming. These rates smell like they really stink today but historically, a 6% mortgage rate has been normal. The 2.75% rate in 2021 was far from normal and something we may never see again.
Jim Porter, NMLS No. 276412, is the branch manager of Solano Mortgage, NMLS No. 1515497, a division of American Pacific Mortgage Corporation, NMLS No. 1850, licensed in California by the Department of Financial Protection and Innovation under the CRMLA / Equal Housing Opportunity. Jim can be reached at 707-449-4777.
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