Happy new year to everyone. It is crazy that we are still talking about the election … it seems like it is never ending. Fortunately the Georgia senate runoffs were the last of this cycle. As Georgia flipped Democratic, treasury rates jumped to their highest since March. Why? What does this mean for interest rates and in turn real estate in both the short term and long term?
What happened in the runoff election?
Prior to the January 5th runoff in Georgia markets were pricing in a split government with Republicans controlling the senate and Democrats controlling the house and presidency. All these predictions have changed with the senate now controlled with a narrow majority by the Democrats. Markets reacted immediately to these changes:
After the announcement of the democratic wins, yields have risen which means interest rates have also risen. Mortgage rates are based off the 10 year treasury so as treasury yields increase so do mortgage rates.
Can the fed “control” mortgage rates and other interest rates?
After the Democratic win, the 10-year treasury price dropped (yield increased). Remember yield and prices move in inverse in the treasury market so as price rise yields fall. It is also important to note that the federal reserve does not control long term interest rates, they can merely take steps (like buying bonds or mortgages) to control the yield curve.
Increased government spending without corresponding tax increases tends to push up Treasury yields partly because it portends more government borrowing and a larger supply of bonds. In the short term we will see an increase in mortgage rates, how much depends on what happens with future spending bills. For example, will the new government pass a bill to provide 2k to every family as proposed in an earlier Democratic bill? Depending on what happens with spending we could see a jump in short term interest rates as the markets figure out how to price in the new administration policies.
Short term real estate impacts from a Democratic win
If mortgage rates move upward significantly this will cause a slow down in the real estate market as payments become more expensive; higher interest rates lead to higher mortgage payments. With limited growth in income, houses become relatively more expensive and this essentially begins to price people out of certain houses. For example, someone might have been able to afford a 300k house, now they can only afford a 250k home due to the higher payments.
If rates rise enough this will slow the real estate market, how much will depend on how high the rates go in the short term.
Long term real estate impacts from a Democratic Senate win
Long term the impact of the Democratic win is much smaller. Even if there were a large stimulus push at the end of the day government spending does not drive the economy. The economy is driven by business growth ultimately leading to capital investment and hiring.
Covid radically changed the business environment with bigger businesses getting larger and more efficient. For example think of Amazon, they have their own warehouses, planes, and now delivery network in most major cities. This efficiency eliminated allot of excess in the supply chain saving huge costs. On the flip side, think of a small business like a restaurant. Many are beginning to automate with online ordering eliminating labor and in turn expenses. Knowledge industries are following suit with banks closing branches and eliminating thousands of positions due to the shift to online banking. All of these changes will hold back wages for many, hiring, and ultimately the economy.
According to the World Bank, “If history is any guide, unless there is substantial reform, we think the global economy is headed for a decade of disappointing growth outcomes”
Before the pandemic, the bank projected that potential global growth between 2020 and 2029 would slow to a yearly average of 2.1%, from 2.5% in the previous decade, as a result of aging populations and lower productivity growth. On Tuesday the bank lowered its projection to 1.9%. Potential output assumes the world economy is operating at full employment and capacity.
The World Bank said the global economy is expected to grow 4% this year after contracting 4.3% in 2020. That 2021 projection is 0.2 percentage point lower than it forecast last June.
Summary
In the short term, the Democratic win will lead to higher mortgage rates as a result of increased spending. The higher rates should temper the torrid pace in residential real estate in the short term. Unfortunately, without substantial growth there will be little inflation in the future and long-term rates will drift back towards historically low levels.
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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine, The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
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