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History Says 6% Mortgage Rates Too Low, Another MBS Crisis is Coming

History Says 6% Mortgage Rates Too Low, Another MBS Crisis is Coming

February 24, 2023974 view(s)

Since 1971, the average mortgage rate has been 6.74%, and the average CPI (Consumer Price Index) has been 4.2%. Real yield is interest rate minus inflation. The mortgage rate has been higher than the inflation rate so banks could make 2.54% annually. Since April 2021, the mortgage rate has been lower than the CPI. The only other time in the last fifty years that happened for an extended period was December 1973-July 1975. Mortgage rates surpassed CPI in February and are starting the climb upward toward the historical average.

Despite the low rate proportional to history, housing data could be better. Freddie Mac shows the current 30-year mortgage rate is 6.32%. The current CPI is 5.5. The pre-pandemic economy would have required  around an 8.04% mortgage rate to be in balance with recent inflation numbers. As unattractive as 6.3% mortgage rates are, they are a bargain compared to the historical norm. 

The existing home sales have decreased for twelve consecutive months to the lowest level in twelve years. The decrease equates to -36.9% from a year ago. One reason is that houses are staying on the market longer. In December, the average number of days on the market was 26, but 33 days in January. National Association of Realtors (NAR) chief economist Lawrence Yun said, "Buyers are beginning to have better negotiating power. Homes sitting on the market for more than 60 days can be purchased [sic] for around 10% lower than the original list price.”

 2022 saw a huge spike and then a rapid decrease in housing prices. In June, average housing prices had climbed to $416,000 and have fallen 13.7% since. Housing prices are up a modest 1.3% from January 2022, the smallest increase since 2012 . Real estate professionals think about inventory in terms of how many months it would take to sell  the currently listed homes. In January 2022, there were 1.6 months of inventory, and 2.9 months in 2023. 

The trend indicates that the worst situation for the housing market is building. Housing prices will continue to fall as mortgage rates continue to rise. Mortgage rates returning to the average will reduce first-time home buyers, and days on the market will grow, leading to higher inventories. The market will force sellers to lower prices to attract buyers to offset higher mortgage rates. The buyer pool will be more investors and hedge funds, who will rent the properties to those unable to afford the down payments. Rent payments will increase, and the cycle will continue.

It is the road to the "by 2030, you will own nothing and will be happy” plan laid out by the World Economic Forum in 2016. It should be noted that the WEF has recently removed the video from their website and now claim that it is a misinformation campaign. The WEF also denied that a great reset was coming for a decade. Still, in response to the pandemic, WEF founder Klaus Schwab released a book calling for a great reset of the economy. It was a conspiracy theory for a decade, and now it is a political agenda. (Just for the record, when they fake an alien landing to stimulate the economy, as economic Nobel prize winner Paul Krugman suggested in 2011 , watching them call deniers conspiracy theorists will be incredibly ironic.)

It's not just the housing market. There is something the media either has yet to notice or is refusing to report. Believe it or not, another mortgage-backed securities (MBS) liquidity crisis is building quickly with more than $10T in distressed assets. The Bank of International Settlements detailed how the pandemic created a perfect storm for another MBS liquidity crisis

Interest rates were low, and housing prices exploded. Homeowners wanted to capitalize on their newfound equity, and first-time buyers hoped to catch up on the run-up. Mortgage companies were writing many new and refinance loans. Also, the government put moratoria on evictions and guaranteed loans. The sheer volume of loans and guarantees by the government made mortgage companies look very attractive. The lockdowns and decreased labor market prompted the government to flood the system with cash. The trillions that the Federal Reserve printed needed to be backed by a debt instrument, with 30% of bond purchases being MBS. 

The Fed is no longer the buyer of MBS, so the market dynamics have changed. The Federal Reserve has $trillions of MBS on its balance sheet to liquidate. Liquidation is another way to say sell or turn an asset into cash. The question is who will buy $trillions of MBS from the Fed. Suppose banks and hedge funds are not the primary buyers. In that case, the $10T burden falls onto retail and small-to-midsized institutions, the least liquid buyers in the MBS market. If there isn’t anyone to buy the MBS, then the Fed can’t sell the MBS. There is no liquidity in the MBS market, so the Fed can’t remove the cash from the system by selling from its balance sheet. 

Suppose the Fed can’t liquidate its MBS. What other tools do they have to fight inflation? The Fed will be forced to raise interest rates significantly higher than expected. Most people will be wiped out because they keep ignoring the warnings. Things are probably going to get worse before they get better. It is time to get some of the chips off the table and put them into tangible assets like precious metals.

It is better to be six months too early than one day too late. What are you waiting for?

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Ryan Watkins, Op-Ed ContributorbyRyan Watkins, Op-Ed Contributor
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