Rates fell in grand fashion last Thursday as Biden took the lead in multiple swing states while, in the Senate, Republicans continued to hold onto their majority. However, by midweek, most of last week’s drop was cancelled out following a major sell-off in the bond market. As such, the 30-year fixed rate mortgage fell a single basis point to 3.01% while the 15-year mortgage fell 10 basis points to 2.48%.
With Pfizer and BioNTech’s announcement that they’ve created a vaccine with 90% effectiveness investors are finally starting to see the light at the end of a (very long) tunnel. Along with moving past a harrowing pandemic which has turned the world on its ear, many are also hopeful this vaccine will eventually lead to a V-shaped economic recovery, a return to the workplace, and a revitalization of the travel industry.
The Housing Tides May be Turning (Except in Coastal Regions)
The possible release of a vaccine by 2021 has ramifications far beyond public health. This was reflected in stocks as home builders saw a drop in stock prices while apartment REITs simultaneously saw an uptick. The question is what does a breakthrough in vaccine testing have to do with housing?
Well, mortgage rates increased this week in reaction to the news and as housing prices continue to rise, investors see this as a sign that homeownership will be slightly less attainable in the future. Additionally, once downtown areas pick up again—once people are properly inoculated against the virus—investors predict that apartment rentals will become attractive again. Keep in mind that this is just based on what investors believe will happen. As it is, rent in metro areas is still down over 20% in certain major cities. In addition, coastal regions that have been harder hit by the pandemic may be slower to feel any alleviating effects.
Treasury Yields Reunite with Rates
The gap between 10-year Treasury yields and the 30-year fixed rate mortgage rate shrank in October according to Freddie Mac’s Primary Mortgage Market Survey (PMMS). This time, it was Treasuries meeting rates halfway, as Treasury yields rose upon news of a Pfizer late stage vaccine trial. Yields move inversely with price, so when yields increase, prices drop. And when prices drop, investors become tempted to sell.
Currently, the spread between Treasury yields and mortgage rates is within a normal range: between 150 and 200 basis points. Given their newfound proximity, a sustained growth in Treasury yields could cause mortgage rates to go up as well.
Ghost of Fannie Mae and Freddie Mac’s Future
Since becoming profitable again in 2012, a portion of Fannie Mae and Freddie Mac’s profits have gone to the U.S. Treasury Department. This in order to make up for their infamous bailout in 2008. At that time, the loans at risk of default totaled $5 trillion dollars. However, since then, they have more than paid back for the past mishandling of funds, allowing the U.S. government to profit in the amount of $88.3 billion as of September 2018.
Over the years, the housing giants have gradually moved out from government control and closer to recapitalization. However, the time it will take for them to be privatized again remains to be seen. On December 9th, the Supreme Court will hear oral arguments on whether the current structure of the FHFA is constitutional or not. Should the Supreme Court find the configuration to be unconstitutional, this could serve as a road block against the GSEs being recapitalized. Another factor is Biden’s presidency, which experts believe will be more focused on meeting affordable housing goals and dealing with forbearance rather than restoring Fannie Mae and Freddie Mac’s private statuses.