I have seen a number of articles lately predicting that mortgage rates will increase in 2021, a couple even of HousingWire’s other contributors. The rationale for these predictions is scholarly, multifactorial and complex. I am, on the other hand, a simple man. Most of the time, I don’t even wear shoes. When I think about the direction of mortgage rates, I only consider one factor – and that is economic growth.

Over the years, I have professed that the rate of economic growth explains pretty much all of the lasagna, which should be the primary focus. When the economy improves, bond yields rise and mortgage rates follow. When the economy slows, bond yields fall and mortgage rates follow. I expect mortgage rates in 2021 to stick to the same pattern.

The trick is to find a respectable range within each business cycle. I started to incorporate bond yield forecasts for my annual prediction articles and every year since 2015 I had said the same range. The 10-year yield would be between 1.60% and 3%. In 2020, that range broke but continued a long-term downtrend in yields that began in 1981.

Before the 10-year rate fell below 1% this year, I wrote this year that if the United States went into recession, the 10-year rate would trade between -0.21% and 0.62 %. On the morning of March 9, the 10 year was trading at 0.34%. From that low point, the 10-year yield has been above 0.62% most of the time during the COVID recession. This has been a strong and consistent indicator for me, that despite all the tragedies in various sectors, the bond market was expecting the economy to improve.

When the COVID recession hit the United States, I came up with an economic model to follow the progress of the economy. I called this model the Model AB because America is back. The last variable to take into account for this model to predict that the US economy will return to growth is that the 10-year rate exceeds 1% and remains in the range of 1.33% to 1.60%.

Time is running out for this last variable to be checked in 2020, but it remains within the realm of possibility. Here are the factors that can either push returns above 1% this year or prevent that from happening.

1. COVID infection rate

Currently, the number of COVID-19 cases in the United States is increasing again. If this trend continues, as I expect as the winter months approach, we will hit new daily highs in the number of cases. The risk to the economy is that if new cases lead to such high hospitalization rates, the government will be forced into much tighter nationwide restrictions to combat the spread of the virus. Without it, the risk to the economy is not as great as some might think now.

Our country has learned to keep consuming goods and services even with a virus that infects and kills Americans every day, the ups and downs in infection rates haven’t affected the bond market or the economic data too much. recently.

Take the recent data on retail sales as an example. After the drastic drop at the start of the crisis, retail sales have now exceeded pre-COVID figures. We have to attribute some of these gains to the disaster relief program. Second, the fear of COVID-19 has moved away from American behavior, which means we have moved from hoarding toilet paper to buying houses, cars, driving more and buying more things. in line.

But, even with disaster relief, it is impossible for the US economy to operate near full capacity with this virus still active in our society. Even though we have seen V-shaped recovery data in several sectors, parts of the economy are still in place at best. The prices of energy for one, prove it on a daily basis.

Eventually we will have a vaccine and multiple effective treatments to fight the virus and these will be the missing links to bring our economy back to its traditional slow and steady growth like we had in the previous expansion – the longest expansion. economic and employment history.

2. Elections and more disaster relief

The disaster assistance distributed to Americans in distress this year actually did what it was supposed to do. As a result of tax assistance, real disposable income and the personal savings rate have increased this year to higher levels than before COVID. Even though the effects of the initial increase in the $ 1,200 check and increase in unemployment benefits wear off as our politicians continue to argue over the next step, personal savings and disposable income remain higher. at 2019 levels.

If we had not implemented massive disaster budget aid and the monetary actions of the Federal Reserve, I think the bond market would still be in the recession range of – 0.21% to 0.62%. In my opinion, we must continue to distribute disaster relief to economically distressed people until the unemployment situation improves significantly. I don’t expect the United States to operate near full economic capacity until COVID treatment improves to the point that only a very small percentage of cases require hospitalization and / or a effective vaccine is widely available.

I have to wonder why Republicans were so determined in their refusal to give President Trump months ago the trillions of dollars needed to energize the economy ahead of the election. Removing the uncertain state of disaster relief would have been a much needed feather in Trump’s hat. After all, when it comes to winning elections, “it’s the stupid economy.”

I suspect some Republicans just don’t believe Trump can win this election and don’t want to pass anything that might help the economy during a Biden presidency. In addition, Democrats have a $ 1.8 trillion bill for disaster relief offered by Republicans, and trying to play their political role too much just means a lack of disaster relief right away.

I know some would argue that some Republicans in the Senate will not agree to the $ 1.8 trillion disaster relief package the president now wants. However, I think President Trump would put them back in order if Democrats accepted the $ 1.8 trillion disaster relief package proposed by the White House. Maybe there is a low-key agreement among politicians that something will be done before the election that is not known to the public. I know a deadline has been set by Democrats to do something this week, so hopefully something will be done. For me the policy is always the same, Poly, Ticks. I regret my cynicism, but I can’t get rid of it either.

Either way, the bond market, and therefore mortgage rates in 2021, could go up if we get a boost for either party. If Biden wins the presidency and the Democrats get the Senate, we can expect a lot more disaster tax help to come. If President Trump wins the presidency and the Republicans hold the Senate, I also expect a disaster relief plan to be passed immediately to support the president and the American people.

However, if Biden wins the presidency and Republicans hold the Senate, we can expect Republicans to pick up their favorite song and dance of “We’re Broke” – and withhold additional disaster relief for as long and for so long. that they can. This third scenario would be a factor in maintaining the rise in bond rates. However, I think a proven and effective COVID-19 vaccine and treatment can make up for a smaller-than-expected disaster relief program.

GDP growth will be relatively high in the third quarter because we are working from the mother of all low bars. It will be what happens in the fourth quarter of 2020 and the first three quarters of next year that will guide the bond market. Don’t expect a 10-year return above 2% or mortgage rates above 4% in 2021 until we get a vaccine, approved treatments and more disaster relief. Remember, we have nearly $ 17 trillion in negative returns around the world as the world grapples with the economic ramifications of COVID-19. As we can see from the recent Jobs Report, we have a lot of work to do here in America to bring us back to the employment level before COVID-19.

To say that many dramatic events are set to happen by the end of the year would be an understatement between the election, the increase in COVID-19 cases and the dispute over more disaster relief. It’s a lot on the plate for the last 11 weeks of the year. Plus, the family is talking on Thanksgiving this year! Even though this is a zoom event, there can be a lot of intense family talk.

Keep in mind that the bond market will outpace steady economic growth, even if it is between 1% and 2.5%. We want to see higher bond yields and mortgage rates, as that would indicate that the last economic sectors damaged by COVID-19 are on the mend. Once we can get a 10-year return above 1%, then I can check my last variable in the America is Back business model.

However, remember: higher or lower mortgage rates in 2021 will depend on the level of economic growth, positive or negative. What I discussed above are some factors that can play a role in this for the rest of the year.


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