Mortgage rates fell on the day Silicon Valley Bank went bankrupt. In times of panic, financial market investors seek out the safest asset. Nothing is more secure than U.S. government bonds; they will be paid. There are, however, interest rate risks that all banks should properly manage or suffer the fate of SVB.
Government-guaranteed assets are next, so the mortgage investors of VA, FHA and most conforming mortgages can be assured they will get their money back. The average 30-year rate, therefore, fell from 7% to 6.5% in the course of two days. On a typical-size mortgage, the monthly payment fell by roughly $100.
More declines could happen. Stubbornly high consumer price inflation is decelerating, if slowly. It was running at 9% in mid-2022 before showing some improvement to 6% in February’s data. It needs to get to 2% before the Fed can declare victory, which is still two years away, but getting inflation to around 3% to 4% looks likely by year’s end. Despite the frustration of high egg prices, it’s housing costs that matter: Eggs are weighted at 0.2% of a typical household budget, while shelter costs represent 34.4%. And while rental costs are still accelerating at a rate of 8.8% annually, various private sector apartment data show actual rent declines. Also, construction of apartment units is at a 40-year high. More vacant units will soon appear, decelerating rents, possibly sharply.
Given rent projections and the lagging impact of Fed actions, the Fed needs to follow the maxim of hockey great Wayne Gretzky: Go where the puck will be and not where it is. The Fed should stop raising interest rates.
One significant risk remains. Are U.S. bonds the safest asset? The national debt level is making a hockey stick–shaped upturn to $30 trillion. A default is out of the question. But higher borrowing costs for all, including the government, could occur if Washington cannot get its act together.