8 ms·

We have an inflation which is about 8% while mortage rates on 30 year fixed are just 4.7% (15 year fixed are just 3.8%). So I really do not understand logic he

by tlogan 5y ago

We have an inflation which is about 8% while mortage rates on 30 year fixed are just 4.7% (15 year fixed are just 3.8%). So I really do not understand logic here: how can bank give me money at rate 2x times lower than inflation. Seems like free money (and it is no surprise that home prices are going thru the roof). But I’m probably naiive here and do not understand how banking works.

mercutio2 5y ago
The finance industry is not predicting that inflation will continue at its current pace. That, plus the 30 year fixed interest mortgage market is not a naturally occurring market, it is heavily subsidized.
HeavenFox 5y ago
Presumably inflation is not going to stay at 8% over the next 30 years. In fact the current 30-year expected inflation is only at 2.2%: https://fred.stlouisfed.org/series/EXPINF30YR https://fred.stlouisfed.org/series/EXPINF30YR
- MisterMower 5y ago
  What was the Fed’s outlook a year ago? Was anybody predicting 8% inflation? Forgive me for my skepticism, but these guys are at best guessing. Most likely they are straight up lying.
  - gruez 5y ago
    >Their estimates are calculated with a model that uses Treasury yields, inflation data, inflation swaps, and survey-based measures of inflation expectations. So the data is partially based on market data (ie. implied inflation rate based on what the yield on TIPS is compared to treasuries). There's another data series for 10 year inflation that only uses market data and it tells a similar story: https://fred.stlouisfed.org/series/T10YIE https://fred.stlouisfed.org/series/T10YIE. Since this is all market data, made by people who have skin in the game (ie. if they get it wrong they lose money), it should be less gamed the previous metric.
MuffinFlavored 5y ago
Have you peeled back the categories measured by the 8% inflation? This is stupid for me to say but, for example... Used car prices factor into that 8% number. But if you aren't shopping for a used car... it doesn't really affect you, right? Housing affects mostly everybody. Same with energy. I don't truly understand the weighting or everything that goes into the 8% CPI getting tossed around and I understand that it comes out to "on average as a whole, you as a consumer are most likely seeing a roughly 8% increase in cost" but I wonder if it is worth calling out that "actual personally perceived inflation" might be less (or more) than 8% My rent hasn't gone up, I haven't bought a different (new or used) car. Gas is more expensive surely but I think that's an extra $40/mo for me or so. I think Chipotle bowls cost about $3 more now... Not exactly life changing?
- adam_arthur 5y ago
  National market rents are up ~20% https://www.apartmentlist.com/research/national-rent-data https://www.apartmentlist.com/research/national-rent-data Miami is up something absurd like 40% https://theshaderoom.com/major-u-s-cities-experience-drastic-increase-in-rent-prices-miami-metro-area-sees-almost-50-percent-rise/ https://theshaderoom.com/major-u-s-cities-experience-drastic... CPI only shows 5%, due to the lag induced by their rent counting methodology. So inflation as measured by CPI is understated if anything, not overstated. Using the same formula as was used in the 70s would produce double digit numbers.
  - gruez 5y ago
    >CPI only shows 5%, due to the lag induced by their rent counting methodology. So inflation as measured by CPI is understated if anything, not overstated. >Using the same formula as was used in the 70s would produce double digit numbers. Can you elaborate on this? When and what was the methodology changed?
    - adam_arthur 5y ago
      On point one, CPI uses a combination of "owners equivalent rents" and more traditional rent measures. Owner's equivalent rent is basically just a survey where they ask homeowners how much they could rent their house for. So survey participants understanding of market rents may lag. But more importantly, when they survey renters, they ask them what they're currently paying. So if somebody is in a one year lease, and gets surveyed in month 11, they will give a rent figure that's almost a year old. On top of this, CPI includes rent controlled units, below market rent units etc. In some sense this is "correct" because it reflects what people are paying... But the whole value of CPI is to be a forecasting tool. Using lagging metrics is bad design imo. Finally, they only survey 1/6 of the housing stock each month. So the whole sample is not updated every month. To your second question, the biggest change is that CPI used to use home prices rather than the OER measure. That metric would show 15-20% rather than the 5% we get from their current formula. Given that the shelter component is the biggest weight in the CPI, it would shift the number up a few points.
01100011 5y ago
I have no idea if any of this is correct, but my understanding is that mortgage rates are set, more or less, by the market. You have buyers(say, pension funds) with a lot of cash that they need to invest in a relatively safe way. They bid on mortgages and whatever they're willing to pay for those loans sets the mortgage rate. Up until(or maybe still including) now, the Fed has also been one of those buyers in an attempt to push down those mortgage rates. Rates are low because there aren't a lot of alternatives for safely storing cash right now. Normally you could buy government bonds, but rates on those are also negative for the same reasons(demand along with fed buying). When rates on government bonds rise, or when it's obvious we're back in a period of consistent inflation(likely, given the fed's weak move today), investors will have other options and the demand for cheap mortgage debt will dry up at the current price, pushing rates higher.
odonnellryan 5y ago
My 30y is 2.5%. Amazing.
analyte123 5y ago
This is a common sentiment and credit supply is probably a contributing factor to the run up in housing prices. However the value of the asset you’re buying is highly sensitive to interest rates in both directions. It is a bet on decade-long uncontrollable monetary inflation that will also push wages up so you can actually sell or rent the house to someone at the end of it all.
- hackerfromthefu 5y ago
  I don't know about uncontrollable inflation, but 2% inflation is the stated target so the bet is that they will keep to the plan. Then it seems that the reported cpi is consistently lower than reality.
onlyrealcuzzo 5y ago
The odds we have an average of 8% inflation (as measured by the Fed) over a 30-year horizon are ridiculously low. Your spread is high now - but it likely won't be for the entire life of your 30-year fixed mortgage.

by tlogan 5y ago

mercutio2 5y ago

The finance industry is not predicting that inflation will continue at its current pace. That, plus the 30 year fixed interest mortgage market is not a naturally occurring market, it is heavily subsidized.

HeavenFox 5y ago

Presumably inflation is not going to stay at 8% over the next 30 years. In fact the current 30-year expected inflation is only at 2.2%: https://fred.stlouisfed.org/series/EXPINF30YR https://fred.stlouisfed.org/series/EXPINF30YR

MisterMower 5y ago
What was the Fed’s outlook a year ago? Was anybody predicting 8% inflation? Forgive me for my skepticism, but these guys are at best guessing. Most likely they are straight up lying.
- gruez 5y ago
  >Their estimates are calculated with a model that uses Treasury yields, inflation data, inflation swaps, and survey-based measures of inflation expectations. So the data is partially based on market data (ie. implied inflation rate based on what the yield on TIPS is compared to treasuries). There's another data series for 10 year inflation that only uses market data and it tells a similar story: https://fred.stlouisfed.org/series/T10YIE https://fred.stlouisfed.org/series/T10YIE. Since this is all market data, made by people who have skin in the game (ie. if they get it wrong they lose money), it should be less gamed the previous metric.

MuffinFlavored 5y ago

Have you peeled back the categories measured by the 8% inflation? This is stupid for me to say but, for example... Used car prices factor into that 8% number. But if you aren't shopping for a used car... it doesn't really affect you, right? Housing affects mostly everybody. Same with energy. I don't truly understand the weighting or everything that goes into the 8% CPI getting tossed around and I understand that it comes out to "on average as a whole, you as a consumer are most likely seeing a roughly 8% increase in cost" but I wonder if it is worth calling out that "actual personally perceived inflation" might be less (or more) than 8% My rent hasn't gone up, I haven't bought a different (new or used) car. Gas is more expensive surely but I think that's an extra $40/mo for me or so. I think Chipotle bowls cost about $3 more now... Not exactly life changing?

adam_arthur 5y ago
National market rents are up ~20% https://www.apartmentlist.com/research/national-rent-data https://www.apartmentlist.com/research/national-rent-data Miami is up something absurd like 40% https://theshaderoom.com/major-u-s-cities-experience-drastic-increase-in-rent-prices-miami-metro-area-sees-almost-50-percent-rise/ https://theshaderoom.com/major-u-s-cities-experience-drastic... CPI only shows 5%, due to the lag induced by their rent counting methodology. So inflation as measured by CPI is understated if anything, not overstated. Using the same formula as was used in the 70s would produce double digit numbers.
- gruez 5y ago
  >CPI only shows 5%, due to the lag induced by their rent counting methodology. So inflation as measured by CPI is understated if anything, not overstated. >Using the same formula as was used in the 70s would produce double digit numbers. Can you elaborate on this? When and what was the methodology changed?
  - adam_arthur 5y ago
    On point one, CPI uses a combination of "owners equivalent rents" and more traditional rent measures. Owner's equivalent rent is basically just a survey where they ask homeowners how much they could rent their house for. So survey participants understanding of market rents may lag. But more importantly, when they survey renters, they ask them what they're currently paying. So if somebody is in a one year lease, and gets surveyed in month 11, they will give a rent figure that's almost a year old. On top of this, CPI includes rent controlled units, below market rent units etc. In some sense this is "correct" because it reflects what people are paying... But the whole value of CPI is to be a forecasting tool. Using lagging metrics is bad design imo. Finally, they only survey 1/6 of the housing stock each month. So the whole sample is not updated every month. To your second question, the biggest change is that CPI used to use home prices rather than the OER measure. That metric would show 15-20% rather than the 5% we get from their current formula. Given that the shelter component is the biggest weight in the CPI, it would shift the number up a few points.

01100011 5y ago

I have no idea if any of this is correct, but my understanding is that mortgage rates are set, more or less, by the market. You have buyers(say, pension funds) with a lot of cash that they need to invest in a relatively safe way. They bid on mortgages and whatever they're willing to pay for those loans sets the mortgage rate. Up until(or maybe still including) now, the Fed has also been one of those buyers in an attempt to push down those mortgage rates. Rates are low because there aren't a lot of alternatives for safely storing cash right now. Normally you could buy government bonds, but rates on those are also negative for the same reasons(demand along with fed buying). When rates on government bonds rise, or when it's obvious we're back in a period of consistent inflation(likely, given the fed's weak move today), investors will have other options and the demand for cheap mortgage debt will dry up at the current price, pushing rates higher.

odonnellryan 5y ago

My 30y is 2.5%. Amazing.

analyte123 5y ago

This is a common sentiment and credit supply is probably a contributing factor to the run up in housing prices. However the value of the asset you’re buying is highly sensitive to interest rates in both directions. It is a bet on decade-long uncontrollable monetary inflation that will also push wages up so you can actually sell or rent the house to someone at the end of it all.

hackerfromthefu 5y ago
I don't know about uncontrollable inflation, but 2% inflation is the stated target so the bet is that they will keep to the plan. Then it seems that the reported cpi is consistently lower than reality.

onlyrealcuzzo 5y ago

The odds we have an average of 8% inflation (as measured by the Fed) over a 30-year horizon are ridiculously low. Your spread is high now - but it likely won't be for the entire life of your 30-year fixed mortgage.