The Borrow Smart Chronicles - The House Investment and What's In a Rate?

Why is the above chart so important? It is saying that consumers value the investment in their house over all other investments. Investment is the key word here. Most financial advisors don’t see the house as an investment, but a necessity. The CONSUMER however disagrees, they see it specifically as more important than Stocks, Gold, Savings, Bonds and now Crypto!

We use this to help open the minds of an advisor to this important fact, that while living indoors beats living outside, it does cost money. Those money decisions around housing are massive in that the house is the largest expense, but one of the few investments that pays the client back longer term (and in a less volatile manner) than other investments. As such the HOUSE should be Managed as an asset just as LIABILITIES should be Managed.

I’ll be releasing a new V3 of Borrow Smart Repay Smart at the end of this year, with updates, new insights, example and a bonus section on REPAYMENT strategies for consumers. I’ll leave this with you now, and we’ll talk more about the implications of this in our next newsletter. What stands out to you?

a BORROW SMART CONCEPT
Location, Location, Location

Key Insights:

1. Historical Context of Rate Movements:

   • The chart shows several spikes and troughs over the decades, reflecting periods of economic tightening (higher rates) and easing (lower rates).

   • The most recent data point, around 2024, indicates an extremely sharp rise in the Fed Target Rate, reaching levels unseen since the early 2000s.

2. Recent Spike in Rates:

   • Around 2023-2024, there is a notable increase, surpassing the 2.0% level. This spike signals aggressive rate hikes likely due to inflationary pressures or other economic factors prompting the Fed to raise interest rates sharply.

3. Comparison to Historical Peaks:

   • While past cycles show significant rate hikes, the recent spike is one of the largest in recent history. It surpasses previous peaks observed in the early 1990s and 2000s, showing a current aggressive monetary policy stance.

Key Data Highlights:

• 1990s: Interest rates fluctuate between 1.0% to 1.5% but see steep peaks towards the mid-1990s.

• 2000s: The period around 2000 shows the highest spikes before the 2020s, indicating tighter monetary policies back then.

• 2008-2009: Interest rates drop sharply, correlating with the financial crisis.

• 2020s: A strong recovery in rates occurs following a period of very low rates post-2020, culminating in the sharp rise of 2023-2024.

This chart clearly illustrates the cyclicality of monetary policy but highlights the current environment as one of the most aggressive periods of rate hikes in recent memory.

Analysis of Why the Spread is 2.6 ppt vs. 1.7 ppt Historically:

Several factors explain why the mortgage rate spread is wider now compared to historical averages:

1. Market Volatility:

   • The post-pandemic economy has been marked by greater volatility in interest rates due to inflation, monetary tightening, and uncertainty in economic growth. This leads to higher risk premiums for lenders, which they pass on to borrowers through higher mortgage rates.

2. Credit Risk and Demand:

   • Lenders are charging a higher premium due to increased credit risk. Rising home prices, inflation, and economic uncertainty have made the housing market riskier, thus mortgage lenders demand higher rates to compensate for potential losses.

3. Liquidity and Banking Dynamics:

   • Recent stress in the banking sector (e.g., SVB collapse and tighter banking regulations) has made borrowing more expensive, and banks may also have tighter liquidity, raising mortgage rates above Treasury yields.

4. Policy Impacts:

   • The Federal Reserve’s interest rate hikes have led to an overall increase in borrowing costs. However, mortgage rates have been more responsive than Treasuries, possibly due to differences in how lenders perceive risk between long-term mortgages and government-backed bonds.

Summary of Key Data Elements:

• Current Spread: 2.6 percentage points, indicating a larger gap between mortgage rates and Treasury bond yields compared to historical averages.

• Historical Average: Around 1.7 ppt, during more stable economic periods.

• Key Factors: Economic uncertainty, credit risk, and monetary policy tightening have contributed to the elevated spread.

THE KEY POINT: if market and interest rate volatility are suppressed by a FED Loosening, there is almost 100 bps of interest rate compression that COULD happen, so you might see a 25bps drop in rates, and get another 25bps in compression, 2 for 1… but if volatility remains high or goes higher it could work against us!

LIABILITIES and DEBT
What’s Happening.

REAL ESTATE
What’s Happening?

ASSETS and INCOME
What’s Happening?

ON BEING HUMAN
What’s Worth Sharing?

DOPAMEMES
And Other Happy Moments…

Artificial Intelligence
And the Future of Work…

Prompt Idea to Try: (great content for your website) Paste into ChatGPT

{Use the browser tool to search the web for three top-ranking blogs on how buying a first home.

From each blog, extract the main takeaways and insights about how and when to buy a home.

After gathering the information, create a clear, concise bulleted list that summarizes the best advice for buying a home in simple language.

Each bullet point should reflect a distinct piece of actionable advice drawn from the top sources.

Cite References]

Borrow Smart University || National Institute of Financial Education