The above chart caught my eye as I was mapping mortgage rates.
The last two recessions started when the spread between the 30-year mortgage rate and the 10-year treasury yield topped two percentage points.
“Is this a long term pattern?” I wondered. And here is the answer.
30-year mortgage Rate Minus 10-Year Treasury Yield
The normal spread between the 30-year mortgage rate and the 10-year treasury yield is one to two percentage points.
I am not quite sure what to make of this relationship other than to note that six of the last seven recessions began shortly after the spread exceeded two points. There were also some false signals.
We are now in the danger zone with spreads rising faster than the yield on the 10-year note.
30-Year Mortgage Rates
Rate and Spread Notes
- Rates from Mortgage News Daily (MND) are more timely than the weekly rates posted by the St. Louis Fed.
- As of March 24, 2022 the average 30-year mortgage rate is 4.71%. The yield on the 10-year note is 2.37%.
- The current spread is 2.34 percentage points, easily into the spread danger zone shown in the second chart.
Housing Slowdown
- March 23: New Home Sales Decline in February and That’s Before Huge Mortgage Rate Hikes
- March 18: Existing Home Sales Dive 7.2 Percent Wiping Out January’s Big Month
On March 18, I commented “Mortgage rates are up, sales are down big. Get used to this story.”
Housing started slowing even before mortgage rates jumped. New home sales are recorded at contract signing. Existing home sales are recorded at closing.
The existing home sales in February locked in at rates in December or January. According to MND, the rate on January 3 was 3.29%. The rate today is 4.71%.
New and existing home sales are highly likely plunge looking ahead.
Home Prices
The Case-Shiller national home price increase in 2021 is the most on record dating to 1987.
To any rational human being that chart either represents inflation or is a result of inflation. The Fed and most economists are not in the class of rational humans.
Rather the Fed and economists only view rent as inflation.
Case-Shiller National, Top 10 Metro Percent Change From Year Ago
Percent Change From Year Ago Notes (December)
- CPI: 7.0%
- OER: 3.79%
- Rent: 3.33%
- Case-Shiller 10-City: 16.98%
- Case-Shiller National: 18.84%
CPI Understated?
Yes, by a lot.
I do not believe OER is only up 3.79%. Nor do I believe rent is only up 3.3%.
Moreover, home prices are not directly in the CPI, only OER and and Rent.
The Fed Can Undoubtedly Slow Housing
The Fed can undoubtedly slow housing by hiking rates or by selling the mortgage backed securities (MBS) in its massive pile of QE purchased assets totaling about $9 trillion.
OK, consider housing crushed. What about the CPI? As noted home prices are not in the CPI, rent is.
And rent is still rising because of the way the BLS factors existing contracts.
Hard Landing or Soft Landing?
There will be no soft landing whether or not the Fed shrinks its balance sheet at a fast pace or not!
There is only a hard landing or a very hard landing.
I am still waiting for anyone to explain what the Fed can do stop inflation in food or rent.https://t.co/dtkN0y3aiX
— Mike “Mish” Shedlock (@MishGEA) March 24, 2022
I fully understand the Fed can destroy new home buying and thus new home building. but how does destroying new home building lower rent prices.
— Mike “Mish” Shedlock (@MishGEA) March 24, 2022
What Can the Fed Do About the Price of Food, Medicine, Gasoline, or Rent?
I keep asking that question to those who claim rate hikes and quantitative hiking will cure inflation as measured. I have not received any credible answers.
They way overdid QE and it should have been obvious to them.
Of course, the problem is these clowns do not count obvious asset bubbles as inflation.
If they repeat the error in the other direction, @biancoresearch will be correct on how much the Fed hikes! https://t.co/0kODcCOGJd
— Mike “Mish” Shedlock (@MishGEA) March 25, 2022
Rates hikes will not impact inelastic items.
Destroying home buying and thus home building will not do anything about rent. If anything suppression of home building will make rents go up.
For discussion, please see What Can the Fed Do About the Price of Food, Medicine, Gasoline, or Rent?
The one credible answer that no one has come up with is something I have stated many times over the past few years: If home prices and the stock market are measures of inflation on the way up, then logically they are measure of deflation on the way down.
The Fed needs to hike rates until they crush the stock market and home prices enough to also collapse demand for elastic goods and services. Then the Fed needs to change its asinine methodology that fosters economic bubbles.
The questions of the day are how likely is that? And how long would it take if they try?
This post originated at MishTalk.Com.
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