Inflation Rates v. Mortgage Rates

Last week, the number of home mortgage applications rose due to an increase in refinance and buying activity, even as mortgage rates fell.  In early June, mortgage applications had a 3-week decline.  This would be of no surprise as inventory for active listings have shown a steady decline since the same time last year.  However, it is interesting to note that USDA loans rose from 0.4% to 0.5% of total applications and FHA applications went from 9% to 9.6%.  A USDA loan is not a direct loan from the government; instead, they are backed by the U.S. Department of Agriculture.  They can offer zero down and much lower rates for low to moderate income families in rural areas.  Whereas, an FHA loan is backed by the government to allow those with lower credit scores to obtain affordable housing.  The downsize of receiving an FHA is the monthly mortgage insurance premiums.

The average rate on a 30-year fixed-rate mortgage backed by the FHA rose from 3.12 percent to 3.14 percent, a decrease of 0.33 percent to $0.34, including accrual fees and 8.0 percent of the loan’s LTV. The average interest rate on a 5% 1% ARM increased from 2.54% to 2.69%, an increase of $0.38 to $1.30, including the originating fee and 8.0% of LTV. The size of the loan fell from $338,600 in the previous week to $335,400, while the average amount of a buy-to-let mortgage rose from $300 to $410,300.

Inflation Rate v. Mortgage Rates

In the United States, the current inflation rate is 5.4%; whereas, mortgage rates are approximately +3%.  Inflation rates have skyrocketed from 1.4% (Jan 2021) to 4.2% (Apr 2021).  As the U.S. Treasury prints more money to cover the M1 supply inflation rates increase.  The M1 money supply is composed of Federal Reserve notes—paper money and coins. If the central banks lend more money than they have in reserves, a practice known as fractional banking, than banks may fail.  So, the U.S. Treasury prints more money to cover loss.  This can be a benefit to those who are in the market for a loan. 

As the Federal Reserve gets more money, the consumer has increased their buying power.  The banks are in the lending money business.  They want your business in forms of very reliable investments, such as, real estate.  A smart consumer should take advantage of this unique opportunity and sell/buy a home. I know I have taken advantage of this unique financial opportunity.

Active Listings in Oakland County 2019-2021

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