Inflation – The Problem and Opportunity

January 11, 2021jordanreedNews

Last Week in Review: Inflation – The Problem and Opportunity

This past week we watched stocks and rates move higher with the former hitting all-time highs and the 10-year yield crossing above 1.00% for the first time since March. At the same time, mortgage-backed securities (MBS) traded lower, causing home loan rates to tick up just slightly from the lowest levels ever.

What was the main driver for these market moves? Inflation.

The Georgia Senate runoff ended with one party in power of all three branches of government. The market’s knee-jerk reaction is we will see endless stimulus measures, and this has sent inflation expectations to the highest levels in over 2 years!!!

The Problem:
MBS are the bonds which determine mortgage rates, and inflation is one of the main drivers. If inflation rises, rates rise – period!

Fortunately, the daily Fed bond buying has offset some of the selling pressure caused by the rising inflation fears. Looking ahead, if inflation expectations continue to rise, the Fed will be forced to do more to pin down long-term rates, like more bond buying or some sort of yield curve control (YCC).

The Opportunity:
Millennials made up more than 1/3 of home purchases in 2020. One thing they have no experience with is inflation. The last time we had serious inflation, many of them were not even born. It is an opportunity for mortgage and housing professionals to educate them on the problem above and the screaming opportunity. In an era of higher inflation, you want to own real assets, like real estate which is a wonderful hedge against higher inflation. Moreover, when inflation rises, wages rise. So millennials today can lock in an “artificially” low mortgage rate thanks to the Fed bond buying, and more easily pay down that mortgage over time with ever increasing wages seen in an inflationary environment.

Bottom line: This past week we may be seeing a shift towards slightly higher rates in 2021.

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