My colleague Michael Batnick wrote a great post yesterday discussing how bear markets typically wipe out years’ worth of gains. (Before anyone leaps to an unfounded conclusion, the title of this post refers to the 2000-02 crash, and not the current weakness). Given the rough start to the new year of trading, it might be worthwhile to delve deeper into various crash scenarios for those of you who have not lived through the unwind of a bubble.
Understanding that intellectually is easy, but truly grokking the forces at work on people’s psyches during a crash is not. It is similar to warfare: perhaps you can imagine what it’s like, but only those who have lived through it truly understand the intensity and magnitude of the experience.
Batnick used the Dow as his example due to its long history. My frame of reference is the Nasdaq-100, traded as the QQQs. Nasdaq was where all the action was in the 1990s. I won’t bore you with war stories from trading that era; But being a trader or a strategist or a portfolio manager through the boom & crash was a once-in-a-lifetime experience; you could not help but learn about psychology, risk management, human behavior, and more (so long as you were not hiding under your desk).
We have since been through two other 30%+ crashes since the dotcom implosion: The GFC in 2008-09, and the Covid 2020 crash. But neither of those examples were truly stock market bubbles like the 1990s experience was. Here is what really stood out to me from those years:
–Skill and Experience: Good traders use many strategies to their advantage: They could pyramid, e.g., add to successful positions as they rose in price. Some averaged down (not a great strategy) but even that could work. Strategies that paid off handsomely when they were used in a 5X run over four years were less successful over the ensuing decade.
–Capital is crucial: Successful, experienced traders were rewarded with more capital and greater risk tolerances by their firms and clients. They could hold positions longer (enormously beneficial in a bull). In the days before full computerization, they could exceed their capital limits intraday. Those who were “proven moneymakers” got more ammunition to trade with, and much longer leashes.
This worked wonderfully during the 1990s phase but led to mixed results once the peak was behind us. Managing these kinds of risks is what sets apart the trading best shops (Citadel, Renaissance, GS) from everyone else that had trading disasters befall them.
–Leverage can be deadly: Some folks try to make up for a lack of capital by using leverage or options to magnify the results of their trading. That merely creates an enhanched two-sided bet — more upside, more downside. It is a risk that I suspect newbie traders on RobinHood and Reddit might not fully iunderstand yet, but (eventually) will figure out, sometimes painfully.
–Muscle Memory Persists: Investors conditioned to buy the dip take a long time to unlearn what has worked for a decade prior. The 1997 Asian financial crisis and the Long Term Capital Management collapse in 1998 each led to robust recoveries and further gains. Thosde experiences make it very difficult to break that habit.
One of the things that made the March 2000-October 2002 period so pernicious was that the recoveries that followed every single drop subsequently failed. Starting in December 1999, there were drops of 15.5%, 10.7%, 31.6%, 21%, 13.9%, 26.8%, 27.1%, 28.2%, 48.9%, 44.8%, and 50%. Each one of these moves lower led to buyers jumping in to take advantage of discounts, only to see the a subsequent rally that failed. New lower lows occurred, with fewer dip buyers each time. This is how we eventually work our way towards what technicains call a sellers’ exhaustion.
–Volatility is a 2-Way Street. Risk and Reward are two sides of the same coin. Very often some of the biggest gainers with the most recent buyers give back more than average. In the 1990s, the Nasdaq outperformed the S&P500 which regularly beat the Dow Industrials. The crash saw the NDX 100 fall 82.9% (see chart at top), the S&P was almost cut in half down 49%, while the DJIA fell “only” 38%. This cycle, that has been the rotation into and out of the Work from Home stocks. As my friend J.C. likes to say, “The bigger the top, the harder the drop.”
–Regret Minimization: I have told this story before, but when you are sitting on immense gains, especially in your employer’s stock or your own start-up, taking something off of the table can be a smart move. You still have lots more stock, so if the market continues to rally you to participate but if it doesn’t you have something to show for it.
–Other asset classes lessen the pain: The popular mid to late 1990s trade was to sell some stock to buy real estate: I vividly recall clients rolling out of some equity to buy vacation properties, bigger homes, better commutes, or nicer neighborhoods. Some rationalized the swap as stocks continued to rise as a fair exchange, but they were delighted after the crash. Not everyone was so lucky.
Some last observations: I am not suggesting the current weakness is the beginning of a crash; the economy is too strong, rates are still too low, and profits remain strong. My best guess is this is likely markets digesting the gains of 2021, and adjusting to the idea of 3 or 4 rate hikes from the Fed.
Bull markets have a tendency to run much further and longer than even the most optimistic investors expect. It would not surprise me if we were still in the 5th or 6th inning of a secular bull market that continues for years…
Bear Markets Suck
Irrelevant Investor, January 13, 2022
End of the Secular Bull? Not So Fast (April 3, 2020)
Corrections & Declines (April 17, 2019)
Stealth Correction? Its Bullish, Says Batnick (October 10, 2018)
Redefining Bull and Bear Markets (August 14, 2017)
Market Volatility – The Good News & The Bad News
FOMO’s Engines Are Sputtering: The Good News & The Bad News
Authored by Peter Tchir via Academy Securities,
We Do More By 9am Than Most……
FOMO’s Engines Are Sputtering: The Good News & The Bad News
We Do More By 9am Than Most…
It feels like it was only last week that we published our 2022 Market Outlook. Technically it has only been two weeks, but so much has gone on. The start of 2022 has kept everyone busy, not only dealing with significant market volatility, but also trying to figure out how a variety of issues are going to shape the economy and markets. I’ve wanted to focus on a couple of “thought” pieces, one on the ongoing inability to hire people and another on China’s delinking, but markets have forced me to stick to other topics. So here we are on January 17th and I think that all we can do is highlight the biggest issues, many of which seem like they are at inflection points, so that we can prepare for the coming weeks and months. Maybe this is why those old Army recruiting ads said that “In the Army, we do more by 9am than most people do all day.” Certainly, in 2022, January is forcing us to do more than we usually do in a quarter, if not a year!
End of Omicron
Markets have been way ahead of politicians and the mainstream media for some time.
The U.K., which was ahead of the U.S., is exhibiting a pattern very similar to what we saw in South Africa. The massive spike in cases is already declining. Hospitalizations, which never got to levels seen back in March 2020 (or during the Delta wave) seem to have peaked and the lag effect is being accounted for. Deaths have also remained extremely low.
I keep reading statistics that Omicron might be ½ as severe as Delta, but I bet that by the time final statistics come out, the number is going to be closer to 10% as bad (though it is difficult to tell, since we still often don’t know which variant people had or have good details about what vaccines or boosters people had either). See Chalk and Cheese for the quality of data that we should have.
In any case, even the fear mongering side of the media seems to be running out of ways to twist the data, especially since almost everyone seems to ignore cases. A Tale of Two Omicrons highlighted how the same data can be twisted to tell very different stories. The data, to me, seems to be much more supportive of the “mild and almost over” scenario.
The good news is that the pandemic is becoming endemic, which will boost the economy over time. Some businesses, especially in travel and leisure, will benefit and it should help ease some supply chain issues. That bad news is that much of this is already priced into markets.
From Transitory to Four Rate Hikes?
Hmmmm….I have been in the higher inflation (at least 3% average) for longer (2 to 5 years) camp since the start of 2021. I spent the better part of the year banging my head into the word transitory and trying to argue that things had “changed” – namely the near- and medium-term inflationary aspects of sustainability and China’s retrenchment to a more inward-looking society and economy.
Now it is like there is some race to be the first to call for more aggressive Fed actions! Some of those shouting “transitory” the loudest seem to be the ones screaming for hikes and aggressive Fed policy. I like the “hot hand” theory of coaching basketball – feed the ball to whoever is shooting well. We seem to be taking the exact opposite approach.
This cacophony of noise seems to help drown out the reality that the “inflation is a problem” issue only got real traction once it became a political soundbite.
Yes, inflation does cause some problems for many, with the poorest people bearing the brunt of the problems. However, we have jobs and wage growth is offsetting inflation for many! Also, there is no obvious path to a sustainable economy with “better” infrastructure and “better” supply chains without going through a period of inflation. So, do we give up on these initiatives?
Despite being in the “inflation will be higher for longer camp,” the contrarian in me can’t help but push back on a few things:
Inventory Glut. Okay, glut is a bit extreme, but there is some evidence that consumers overbought late last year and responded to supply shortages by buying more than they would otherwise. At the other end, companies have been frantically trying to acquire goods to sell into this “demand spike.” As supply chains normalize (which is occurring slowly, but surely) we are seeing inventories build. I expect that in Q1 there will be some chatter that companies have gotten ahead of themselves. I will go out on a limb and bet that it will be cheaper to buy a new car by the end of the year than it is today (including incentives, etc.)
How leveraged is the economy and the market? Since Bernanke, I’ve been in the camp that we have kept accommodative and innovative policies in place for too long and central banks across the globe have been too slow to normalize, which has made markets and the economy even more dependent on that support. Accommodative policy has become entrenched in such a way that it is more and more difficult to extricate ourselves. Central bankers would argue that they were too quick to stop the accommodation and that is why we’ve never had the breakout, so we will just have to agree to disagree. The one thing I think that we can all agree on is that our tolerance for “pain” is very low. The slightest dip in markets or the first inkling that the economy is slowing will have people (especially the politicians) screaming for easier money! For many politicians, their attention span for soundbites seems to be that of a gnat (though that might be unfair to gnats). However, I don’t think that politicians are more worried about inflation than jobs, growth, and wealth. If any weakness in those areas arises, inflation worries will go out the window. I am clearly betting against four hikes this year (while still believing that inflation is going to be higher for longer).
Jawboning! I have seen surprisingly little on the theory that the Fed is just jawboning, i.e., jawboning the markets to push inflation expectations to an acceptable level and jawboning politicians to keep them happy. Jawboning has been one of the best tools of central bankers for decades and the fact that so few seem to be discussing that right now seems weird. Expect the Fed to “Talk like a Hawk and Hike like a Dove.”
I expect the Fed to act, end QE quickly, start hiking, and even talk about QT. Markets seem about halfway through digesting this. But, by the time the market fully digests that, there is a real chance that we will see a pullback on hawkish activity as a confluence of events could spur some growth fears.
In early December, Academy published Will Russia Invade Ukraine? We also discussed Russia, China, Iran, and cyber-attacks in our latest Around the World. On Thursday, we published our latest Geopolitical Flashpoints Podcast, which examines some interesting scenarios (not all of which are bad, though there is a tilt towards the negative risks).
We are all watching the accumulation of troops on the Ukrainian border with trepidation. There are ongoing negotiations, but they have done little to resolve the issue.
A few things to highlight regarding our current thinking on the subject:
Putin needs a “win” for his own domestic standing and while a negotiated victory is good, taking back a piece of land is better.
Putin truly believes that red lines have been crossed by NATO with troop and missile deployments near Russia’s border.
Putin’s request for security guarantees from the West (including agreeing never to allow Ukraine to join NATO) is a non-starter.
The energy crisis in Europe (cold weather, too little wind in Germany for their windfarms, and botching the transition to sustainable sources) is a “perfect storm” that may well not exist next year. The current energy crisis gives Russia more leverage and they cannot depend on this mix of ineptness and weather to occur again.
Putin does not appear to be deterred by the threat of “start high, stay high” sanctions because he feels that they might not all be enforced (some could economically impact U.S. allies) and he has built up a $620 billion reserve to lessen the impact of any sanctions.
The reality is this crisis goes far beyond Ukraine and is part of an elaborate plan to not just push back NATO and bring former Soviet nations back under Russian influence, but could be the beginning of further projections of power and expanded Russian nuclear weapons deployments closer to the U.S.
Negotiations have a chance, but my sense is Academy’s GIG is far less optimistic on that front than our politicians seem to be.
We do NOT believe that any incursion would extend to Kiev. It would be restricted to Eastern Ukraine.
My base case, from all our discussions, is invasion/incursion into Eastern Ukraine will occur with a pretext as to why it was necessary (even “humanitarian”) and Europe will cave in exchange for the flow of energy and some promises that “Russia has no further interest in advancing, etc.” I can’t help but think about Neville Chamberlain’s “peace in our time”, but some strong language in some new agreement probably appeases enough politicians that they can acquiesce to the incursion.
Somewhat sadly, from a human perspective, that base case seems to be what is priced in. A negotiated settlement would probably be a pleasant surprise for markets, but an invasion followed by a relatively quick (within a week) acceptance with some promises, is unlikely to move markets too much.
In the unlikely event this becomes a full-scale invasion of Ukraine (with the West defending Kiev), some things I would be watching for include:
Does Europe start to splinter? Do we see a “pragmatic” side (that accepts this outcome in exchange for energy and promises) face-off against an “idealist” side (which pushes hard to defend the sovereignty of Ukraine)? Where does the U.S. fit in? We have an easier time being idealistic as the energy crisis is more remote. This is all against a backdrop of Brexit, proving the European Union is not as solid as many believe. It is also against the backdrop of Turkey, a NATO member, buying Russian made missiles. This could turn out to be a divisive issue for Europe and NATO. That is not the base case, but if this scenario starts to play out, it will hurt the global economy and markets.
Does it encourage China to act? General Spider Marks, our Head of Geopolitical Intelligence, is quick to point out that geography makes it much easier for Russia to take part of Ukraine than it would be for China to try to take over Taiwan militarily. Having said that, China has other hot spots that they are involved in, and they may choose to flex their muscles. The comment one of our Generals has focused on is that China may like to prove that their military is as good on the field as it seems to be on paper. In any case, China’s response if there is an invasion will be telling and may do more to change the global economy than a Russian invasion would. This remains an issue for us to figure out even if Russia doesn’t invade, but an invasion would be such a catalyst that we’d get answers much quicker.
We have seen some pressure on markets and some wicked rotations within the equity markets.
As we have traded to lower levels, I am slightly less bearish.
I continue to believe that FOMO/TINA type of assets (those asset classes and stocks that most benefited from aggressive monetary policy) will underperform safer/simpler/dividend/reopening types of assets. (See FOMO’s Engines are Stuttering or the 2022 Outlook for more details on the sectors/asset classes).
We lay out the shifts to our outlook in How the Year Changed in Minutes. The big shift is that the underperformance/outperformance will occur in a weak market rather than in a strong one.
Weirdly, despite Russia and Ukraine, I like Europe to outperform and I still think that EM (ex-China) has a lot of upside.
Credit should be relatively stable and I continue to think that structured credit will be a key driver to any alpha in 2022.
What would make me bullish risk assets?
I want to see one traditional “risk-off” day. A big flight to safety day where Treasuries (at the long-end) rally while stocks (despite lower yields) keep selling off. We had some of that on Thursday, but then on Friday we saw stocks trade well with bonds trading weak.
From a market’s perspective, this is what I think we need.
As data comes in, the Fed speaks, and geopolitics play out we will have to adjust, but for now, we are not finished adjusting to a less supportive central bank.
The one caveat is that China’s central bank is acting aggressively, but I suspect that is because the real estate debacle there is worse than we realize and their policy towards Covid is causing them more problems so I am not overly excited about China’s accommodative central bank policy. It is something that I could be overly pessimistic on since it goes against the recentralization and delinking of China theory that I have, but I’m just not that excited (this is where I try to remind everyone that Lehman wasn’t a moment).
In any case, let’s keep navigating 2022 and always try to “Be all you can be!”
Is the US Economy Operating Above Its Capacity?
If we can get the pandemic under control, the supply problems we are now seeing will dissipate over…
Many economists, including me, have been attributing the high inflation of the last year to problems associated with reopening from the pandemic. According to this view, price increases in many areas will slow soon, and in some cases, like new and used cars, be largely reversed. In this view, the problem with inflation is temporary and will be resolved without major policy changes in the not distant future.
However, there is an alternative view, pushed by economists like Larry Summers and Jason Furman, that the stimulus provided by the American Recovery Act, and the prior CARES Acts passed in 2020, provided too large a boost to the economy. They pushed the economy beyond its ability to produce goods and services. In this view, the inflation problem is not temporary; we are likely to see continuing problems with inflation unless the Fed takes steps to clamp down on demand and slow the economy.
The basic logic of this argument is that GDP in the last quarter of 2021 will be well above the level of output in the fourth quarter in 2019 (the last pre-pandemic quarter), even though employment is still well below the 2019 level. Since we also saw a drop in investment, the capital stock will be below its trend growth path. This should mean that productivity should be lower than its pre-pandemic trend path. And, the pandemic has raised costs in many areas, putting further pressure on prices.
I will make three points as to why I don’t view these arguments as compelling:
- The drop in hours worked is less than the drop in employment, due to lengthening of average workweeks. This means that total hours are not far below the level in the fourth quarter of 2019.
- The drop in investment was actually small compared to prior recessions, with structure investment seeing the largest falloff. Furthermore, the relationship between investment and near-term productivity growth is very weak in any case.
- There is an easily identifiable source of substantial productivity gains – less business travel – which could have increased productivity over this period by more than 0.5 percentage points.
The Drop in Hours and the Drop in Employment
Taking these in turn, it is important to recognize that there has been a substantial increase in the length of the average workweek from before the pandemic. This presumably reflects the decision by employers who can’t hire more workers to have their existing workforce put in more hours. The length of the average workweek was 34.3 hours in the fourth quarter of 2019. It was 34.7 hours in the fourth quarter of last year.
While the drop in employment between the fourth quarter of 2019 and the fourth quarter of 2021 was almost 2.0 percent. The drop in hours using the Bureau of Labor Statistics index of aggregate hours was less than 0.7 percent.
Furthermore, the payroll data misses a substantial increase in the number of people reporting that they are self-employed. This figure was almost 400,000 higher (combining incorporate and non-incorporated self-employed) in the fourth quarter of 2021 than the fourth quarter of 2019. If we assume the self-employed put in the same number of hours on average as payroll employees, this reduces the drop in total hours over these two years to just 0.4 percent.
If we assume that fourth quarter GDP growth will be 5.0 percent (the latest projection from the Atlanta Fed’s GDPNOW model), then GDP will be 2.7 percent higher in the fourth quarter of 2021 than in 2019. If we add in the 0.4 percent decline in hours over these two periods, that implies productivity growth of 3.1 percent over the last two years, 1.6 percent annually. That is somewhat higher than the 1.0 percent average since the end of the Great Recession, but almost exactly in line with the 1.5 percent average productivity growth in the three years before the pandemic hit.
This means that we don’t need to postulate any extraordinary uptick in productivity growth to say that the economy is still operating within its potential, if it was at its potential in the fourth quarter of 2019. Of course, it is possible that even in the fourth quarter of 2019 the economy was still somewhat below its potential. While the unemployment rate was very low, the prime age employment to population ratio was still below prior peaks. And, there was no evidence of accelerating inflation at the time. If there was still some slack in the economy at the end of 2019, there is less reason to believe that we are operating above the economy’s potential level of output now.
Investment and Productivity
Clearly there is some link between investment and productivity growth, but it is not a strong one and certainly not an immediate one. In the 2001 recession non-residential investment fell by 2.2 percent from its 2000 level. It fell further in 2002 so that it was 8.9 percent below its 2000 level. Even in 2003 it was still 6.6 below its 2000 level.
Nonetheless, productivity growth soared in these years. It averaged 3.8 percent between 2000 and 2003. It is almost certainly true that productivity growth would have been even quicker without the falloff in investment, but even this large drop did not prevent rapid increases in productivity.
By comparison, investment was 5.3 percent below its 2019 level in 2020. It’s on a path to be more than 2.0 percent above its 2019 level in 2021. It seems unlikely that the relatively modest drop in investment in 2020 coupled with the still below trend path level in 2021 would have a major impact on productivity this year.
The Wonders of the Internet and Productivity Growth
The pandemic has forced companies to change the way they do business. One change has been that there is far less business travel. The money spent on business travel in the United States fell from $291 billion in 2019 to $131 billion in 2020, and then rebounded slightly to $157 billion in 2021.
Business travel is in effect an expense of doing business, like the steel used to construct an office building or the energy used to power a factory. If companies can produce the same output, with less business travel, it is effectively an increase in productivity, just as if they needed less steel to put up a building or less energy to operate their factories.
While it may be the case that businesses are actually less productive as a result of the decline in business travel, it is reasonable to believe that this is not the case. As it stands, we are producing a slightly higher level of GDP with much less business travel. (It’s possible there will be some long-term effect, where we see smaller productivity gains in future years because of less person to person contact, but we’ll have to hold off in assessing that one.)
Anyhow, it might go against our economist instincts to think that companies would needlessly wasting money sending their employees flying around the country and the world, but it is at least possible that this is the case. If we treat the reduction in travel as eliminating waste, then we went from spending 1.5 percent of GDP on business travel to 0.8 percent of GDP in 2021, implying a gain in productivity from this pandemic induced innovation of 0.7 percentage points, equivalent to 0.4 percentage points of annual growth over the last two years. This strengthens the case that the economy is operating well within its capacity.
Are We Demanding Too Much from the Economy in 2022?
There is no doubt that we are still seeing considerable supply disruptions from both the rapid reopening and the ongoing pandemic. But these are not easily or well-addressed by cutting back demand. We will still see lots of people getting sick and missing work even if the Fed raised rates by two or three percentage points.
It will take some time to work through these issues. Also, there is clearly a large-scale reshuffling of the workforce, as many workers are taking the opportunity to leave jobs they don’t like for better ones. This is disruptive to the economy, but a big positive for workers who have this freedom. We will likely see job churn settle down to more normal levels, as the same workers are not likely to continue quit jobs every few weeks, and employers become more effective in providing incentives to retain workers. Also, some bad employers will simply go out of business.
Anyhow, there is little reason to believe, that if we can get the pandemic under control, the supply problems we are now seeing (along with pretty much every other wealthy country) will not dissipate over the course of the year. And, with prices stabilizing or reversing in many areas, workers will have seen substantial wage gains since the start of the pandemic.
 To make this an apples to apples comparison, we would need to factor in the increase expenses companies incurred from using Zoom and similar services. I’m too lazy to try to do that, but I’m pretty confident that the additional spending would not come close to the savings from reduced business travel.
Daily Mortgage Rates Rise Above 3.9% | January 18, 2022
The 30-year mortgage is starting the week with an average rate of 3.916% — up 0.018 percentage points from the end of last week.
The 30-year mortgage is starting the work week with an average rate of 3.916%. That is 0.018 percentage points higher than last week’s ending rate. All fixed-rate loan categories are higher across the board, with the rate on a 30-year refinance increasing to 4.058%. On the other hand, rates for adjustable mortgages are all lower.
- The latest rate on a 30-year fixed-rate mortgage is 3.916%. ⇑
- The latest rate on a 15-year fixed-rate mortgage is 2.943%. ⇑
- The latest rate on a 5/1 ARM is 2.409%. ⇓
- The latest rate on a 7/1 ARM is 3.769% ⇓
- The latest rate on a 10/1 ARM is 4.001%. ⇓
Money’s daily mortgage rates reflect what a borrower with a 20% down payment and a 700 credit score — roughly the national average score — might pay if he or she applied for a home loan right now. Each day’s rates are based on the average rate 8,000 lenders offered to applicants the previous business day. Freddie Mac’s weekly rates will generally be lower, since they measure rates offered to borrowers with higher credit scores.
Today’s 30-year fixed-rate mortgage rates
- The 30-year rate is 3.916%.
- That’s a one-day increase of 0.018 percentage points.
- That’s a one-month increase of 0.393 percentage points.
Most borrowers opt for the 30-year fixed-rate mortgage because they like the lower monthly payments and the predictable interest rate. Long term, however, this loan type tends to be more expensive than shorter-term loans since the interest rate tends to be higher.
Today’s 15-year fixed-rate mortgage rates
- The 15-year rate is 2.943%.
- That’s a one-day increase of 0.033 percentage points.
- That’s a one-month increase of 0.424 percentage points.
The lower interest rate and shorter term of a 15-year fixed-rate loan are attractive to some borrowers. However, the monthly payments will be higher than an equivalent 30-year loan and will not fit every budget.
The latest rates on adjustable-rate mortgages
- The latest rate on a 5/1 ARM is 2.409%. ⇓
- The latest rate on a 7/1 ARM is 3.769%. ⇓
- The latest rate on a 10/1 ARM is 4.001%. ⇓
Another loan option is an adjustable-rate mortgage. An ARM will have a low, fixed interest rate for an introductory period before it becomes variable and starts resetting regularly. A 5/1 adjustable loan, for instance, will have a fixed rate for five years. The rate will then reset every year. The risk with an ARM is that once the rate can increase significantly once it starts adjusting.
The latest VA, FHA and jumbo loan rates
The average rates for FHA, VA and jumbo loans are:
- The rate on a 30-year FHA mortgage is 3.74%. ⇑
- The rate on a 30-year VA mortgage is 3.76%. ⇑
- The rate on a 30-year jumbo mortgage is 3.601%. ⇑
The latest mortgage refinance rates
The average refinance rates for 30-year loans, 15-year loans and ARMs are:
- The refinance rate on a 30-year fixed-rate refinance is 4.058%. ⇑
- The refinance rate on a 15-year fixed-rate refinance is 3.067%. ⇑
- The refinance rate on a 5/1 ARM is 2.704%. ⇓
- The refinance rate on a 7/1 ARM is 3.912%. ⇓
- The refinance rate on a 10/1 ARM is 4.157%. ⇓
Where are mortgage rates heading this year?
Mortgage rates sank through 2020. Millions of homeowners responded to low mortgage rates by refinancing existing loans and taking out new ones. Many people bought homes they may not have been able to afford if rates were higher. In January 2021, rates briefly dropped to the lowest levels on record, but trended slightly higher through the rest of the year.
Looking ahead, experts believe interest rates will rise more in 2022, but also modestly. Factors that could influence rates include continued economic improvement and more gains in the labor market. The Federal Reserve has also begun tapering its purchase of mortgage-backed securities and announced it anticipates raising the federal funds rate three times in 2022 to combat rising inflation.
While mortgage rates are likely to rise, experts say the increase won’t happen overnight and it won’t be a dramatic jump. Rates should stay near historically low levels through the first half of the year, rising slightly later in the year. Even with rising rates, it will still be a favorable time to finance a new home or refinance a mortgage.
Factors that influence mortgage rates include:
- The Federal Reserve. The Fed took swift action when the pandemic hit the United States in March of 2020. The Fed announced plans to keep money moving through the economy by dropping the short-term Federal Fund interest rate to between 0% and 0.25%, which is as low as they go. The central bank also pledged to buy mortgage-backed securities and treasuries, propping up the housing finance market but began cutting back those purchases in November.
- The 10-year Treasury note. Mortgage rates move in lockstep with the yields on the government’s 10-year Treasury note. Yields dropped below 1% for the first time in March 2020 and have been rising since then. On average, there is typically a 1.8 point “spread” between Treasury yields and benchmark mortgage rates.
- The broader economy. Unemployment rates and changes in gross domestic product are important indicators of the overall health of the economy. When employment and GDP growth are low, it means the economy is weak, which can push interest rates down. Thanks to the pandemic, unemployment levels reached all-time highs early last year and have not yet recovered. GDP also took a hit, and while it has bounced back somewhat, there is still a lot of room for improvement.
Tips for getting the lowest mortgage rate possible
There is no universal mortgage rate that all borrowers receive. Qualifying for the lowest mortgage rates takes a little bit of work and will depend on both personal financial factors and market conditions.
Check your credit score and credit report. Errors or other red flags may be dragging your credit score down. Borrowers with the highest credit scores are the ones who will get the best rates, so checking your credit report before you start the house-hunting process is key. Taking steps to fix errors will help you raise your score. If you have high credit card balances, paying them down can also provide a quick boost.
Save up money for a sizeable down payment. This will lower your loan-to-value ratio, which means how much of the home’s price the lender has to finance. A lower LTV usually translates to a lower mortgage rate. Lenders also like to see money that has been saved in an account for at least 60 days. It tells the lender you have the money to finance the home purchase.
Shop around for the best rate. Don’t settle for the first interest rate that a lender offers you. Check with at least three different lenders to see who offers the lowest interest. Also consider different types of lenders, such as credit unions and online lenders in addition to traditional banks.
Also. take time to find out about different loan types. While the 30-year fixed-rate mortgage is the most common type of mortgage, consider a shorter-term loan like a 15-year loan or an adjustable-rate mortgage. These types of loans often come with a lower rate than a conventional 30-year mortgage. Compare the costs of all to see which one best fits your needs and financial situation. Government loans — such as those backed by the Federal Housing Authority, the Department of Veterans Affairs and the Department of Agriculture — can be more affordable options for those who qualify.
Finally, lock in your rate. Locking your rate once you’ve found the right rate, loan product and lender will help guarantee your mortgage rate won’t increase before you close on the loan.
Our mortgage rate methodology
Money’s daily mortgage rates show the average rate offered by over 8,000 lenders across the United States the most recent business day rates are available for. Today, we are showing rates for Friday, January 14, 2022. Our rates reflect what a typical borrower with a 700 credit score might expect to pay for a home loan right now. These rates were offered to people putting 20% down and include discount points.
More from Money:
- Best Mortgage Lenders of 2022
- Mortgage Calculator by Money
- How to Get the Lowest Mortgage Rate: A Step-by-Step Guide
- How to Get Preapproved for a Mortgage: A Step-by-Step Guide for Homebuyers
- Is Now a Good Time to Refinance My Mortgage? A Decision-Making Guide
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