Mortgages vs. Inflation: The Real Mortgage Rate is Historically Low…

Posted By PK Last updated November 9th, 2011 11 Comments

As we occasionally point out here at Don’t Quit Your Day Job, inflation expectations are an interesting indicator that can be calculated from market data. They become even more interesting when we combine them with other measures. It becomes yet more interesting if you are in the market to refinance a mortgage or purchase a home. Read on for an interactive chart on the 30 year mortgage and the market’s 10-year inflation expectations. And yes, if you are in a reader, you should click through to see the chart)

If you are in a position to buy or refinance, (or not but still interested!) we’d like to share with you some number crunching we have done on mortgages. We took the market’s 10-year inflation expectations as estimated by the Cleveland Fed and crossed them with the 30-year mortgage rates reported by the St. Louis Fed. If you’re looking for a mortgage today, note that mortgages are showing a historically (ahem, since 1982) small gap between the market’s inflation expectation and the 30-year mortgage rate. The implication? As of October, banks are willing to capture the 2.67% percentage point delta between the 30 year rate and the 10 year expected inflation rate.

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Why 10 Year Inflation Expectations? Why not 30?

Anecdotally, we’ve heard that most people buy a new house or refinance in 6 years, so 30-year mortgages aren’t expected to be carried to maturity. It’s impossible to say what the right look-ahead period is… we could use 6 years on that magic number, or we could try to figure out an average turnover from existing home sales and mortgage originations. Let’s call it 10 years. You can go to the Cleveland Fed site if you want to try a different look-ahead period (they have 1 year – 30 years).

Conclusion

Just because the gap is low doesn’t mean it won’t go lower – so keep that in mind before you lock in a new rate. The convergence of the three measures is a sight to behold for people in a position to buy a house or refinance, however. If you do lock in a rate under these conditions, you will be doing it under the best mortgage conditions in the last 29 years. DQYDJ isn’t ready to completely declare housing recovered, but also note that house prices are falling as well. Check out our Real Estate calculators if you want to run some numbers on your situation. Oh yeah, comment!

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http://twitter.com/CollegeInvestin Robert

I have been working on refinancing my property, as I couldn’t pass up these rates!
- http://www.dqydj.net PKamp3
  
  The rates are good… but hey, they could go lower, right? We’re already at unprecedented levels.
http://twitter.com/retirebyforty retirebyforty

I’ll have to drop by and talk to my bank to see if I can refinance. The house is a bit underwater though so I don’t have high hope.
- http://www.dqydj.net PKamp3
  
  I’m not sure what the cutoff would be to refinance – if you refi’d into an FHA mortgage it would be under 20%, but you’d have to factor PMI into your payment (it would be on the good faith estimate you’d get before signing). Might be worth a chat, depending on your current rate. Thanks for the comment!
http://mybrokencoin.com Aloysa

I am on a fence with refinancing. I don’t really want to because I don’t want to pay closing costs and stay in the house for another two years and try to sell it (that’s the plan.) But then I think about it and look at the rates and think that I maybe I should. We are not underwater (miracles happen!) so we could refinance if we wanted to.
- http://www.dqydj.net PKamp3
  
  With a two year framework, odds are you won’t find enough savings to make it worth it. You would have to pay something upfront, and it usually takes a bit to pay it off. You’d have to run the numbers on that one, but (just throwing this out there) odds are you might be better off. Definitely a situational thing, though!
http://wealthinformatics.com Suba

We don’t have a house yet, but will be in the market in the next year or two (as soon as we figure out where we want to be ) This might be a stupid question as I never went till refinancing in my first time home owner reading, don’t you have to pay to refinance? Will it still make sense to refinance after the fee? I guess everything has a break even point? Should play with your refinance calculator, may be that will answer my question.
- http://www.dqydj.net PKamp3
  
  Yeah, everything has a breakeven point, but it’s not that hard to figure out – the calculator would get you most of the way there (basically, match up what you would save with what it would cost). The only input it is missing is the fee you are quoted to refinance. You can roll the fee into the mortgage (and accept a higher rate), or you can keep it separate, but the options have trade-offs, of course!
  
  The most accurate numbers would come from the Good Faith Estimate when you went to buy or refinance… it is usually within a few percent of the final numbers when you go to sign. Of course, you might (like Aloysa was thinking) want to leave before the break even point, so the amount of time you want to stay in the home is also a factor. Definitely run the numbers – but know that historically, the real mortgage rate is ridiculously low.
  
  I’d also point you to this article I wrote about the breakdown of home prices and mortgage rates. All of this comes with this caveat – home prices may be affordable, but that doesn’t mean they won’t fall further!
http://twitter.com/101centavos 101 Centavos

We refinanced a couple years ago, so we’re not looking to do another one. Nifty interactive graph, by the way.
- http://www.dqydj.net PKamp3
  
  Yeah, even with the low rates it’s not automatically a ‘must refinance’ sort of deal. You’ve got to balance out how much it would save you based upon your current scenario.
  
  Thanks for the compliment! I try to keep a lot of the posts interactive so readers can play around with the numbers themselves or see how they’ve changed. I hope that you like the content behind the numbers too – forcing people to click instead of just reading it inside their reader sometimes feels dirty, haha.
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Mortgages vs. Inflation: The Real Mortgage Rate is Historically Low…

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