Yes, it is hard to believe but you, along with me and millions of others, are actually making mortgage rates go down and therefore real estate relatively less expensive. How is this possible?   How are your thoughts influencing long term rates and in turn real estate?  The Federal Reserve Bank of New York just released their survey of inflation expectations which fell to its lowest ever recorded.  Why is this metric important?  What does this survey have to do with rates and in turn real estate?

What was in the data?

U.S. consumers’ inflation expectations slipped again in October, with household estimates for short-term price gains sliding to the lowest ever in a New York Federal Reserve survey, a troubling sign for a central bank battling to prevent growth-sapping disinflation from taking hold.

The median inflation outlook for the next year dropped by 0.2 percentage point to 2.3%, the lowest reading since the New York Fed launched its monthly Survey of Consumer Expectations in 2013. The median three-year outlook for inflation was unchanged at 2.4% in October, staying at the low reached in September.

Consumers’ expectations for inflation have been mostly declining since the start of the year, according to the report which is troubling for the federal reserve and the general economy.

Why are consumer perceptions so important?

Remember that the federal reserve merely sets the federal funds rate and does not directly control mortgage rates. So how are mortgage rates set?  Unfortunately, mortgage rates are not “set”.  There is no government or private party that can set rates per se.  Mortgage rates are typically based on the 10-year treasury yield which is set by market expectations of future growth/inflation or lack thereof.  For example, if we are in an expanding economy rates will typically increase as prospects for inflation/growth are high.  The inverse happens in a low inflation/growth environment like we are in now.

With consumer expectations of inflation continuing to wane, this is influencing the long-term trend of 10-year treasuries which in turn is keeping mortgage rates and other consumer rates historically low.

Why are consumer perceptions negative on inflation?

First it is important to note that there are two primary drivers of inflation, demand outstripping supply and costs rising faster.

  1. Demand: in housing you are seeing a good example of inflation in most cities where new construction has not kept up with the influx of new residents. Take Denver for example, over the last five years hundreds of thousands of new residents have migrated to the area, yet only a small portion of new houses have been built to accommodate the new residents, this has pushed up prices significantly average over 10% increase for the last 10 years.  Unfortunately other than housing, demand has not spurred inflation.  Take your basic staples like autos. There is no shortage of autos to choose from as there is an abundance and so discounts are being given when you buy many cars these days.  This theory can be applied to the vast majority of items throughout the economy from consumer electronics to food which is leading to the perceptions of low inflation staying around for a while.
  2. Cost: in an inflationary environment costs are increasing. In todays’ economy most items are either staying flat on costs or actually declining.  Take food for example, with increased competition and efficiencies costs of food are declining.  This is also true for clothing, toys, consumer electronics, etc.. as the global supply chain expands into lower cost areas and automation takes hold.  The outliers are health care and housing which have not been enough to spur huge cost pressures on the rest of the economy.

With demand not outpacing supply and costs not being passed onto the consumer the perception of inflation has continued to wane leading to long term rates continuing their trend of remaining historically low.

Impact on real estate?

The extremely low expectations of future inflation has made mortgages on commercial and residential properties cheaper (i.e. interest rates have dropped) which has led to real estate becoming “effectively cheaper”.  The reason I say “effectively cheaper” is that even though prices have risen, the actual payments made to buy the real estate enables buyers to spend more for the same dollars.

Lower rates are one of the primary drivers of recent real estate appreciation and will continue to drive the real estate market.

Summary

We have all seen the folks on daytime TV proclaiming that your thoughts can literally change the world.  It is crazy to think that they are right.  Consumer thoughts on inflation are no doubt driving long term rates to historic lows.  This in turn is making real estate effectively cheaper.  This trend looks to continue as consumers continue to doubt that long term inflation will visit anytime soon.

 

Additional Reading/Resources

https://www.reuters.com/article/us-usa-fed-consumer-expectations/u-s-consumer-inflation-expectations-drop-again-new-york-fed-survey-idUSKBN1XF2MV

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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 the Colorado Real Estate Journal, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.

 

Fairview is a hard money lender specializing in private money loans / non-bank real estate loans in Georgia, Colorado, Illinois, and Florida. They are recognized in the industry as the leader in hard money lending with no upfront fees or any other games. Learn more about Hard Money Lending through our free Hard Money Guide.  To get started on a loan all they need is their simple one page application (no upfront fees or other games).