The Future of Interest
So where are we?
30 Year Fixed: 7.08% w/0.8% points
15 Year Fixed: 6.36% w/1.4% points
5/1 ARm: 5.96% w/0.3% points
Are we headed for a recession?
Likely sometime next year although there are those that think we may already be in one (it's hard to tell until a bit more time has passed). There are those that think the Fed is being too aggressive with interest rate rises - their position is that interest rate rises affect the economy slowly and it is better to raise and wait rather than raising continuously.
When will sanity be restored?
Morningstar predicts a deceleration in interest rates next year as they believe inflation will be tamed pretty quickly.
- Interest-rate forecast. We project a year-end 2023 federal-funds rate of 3%, compared with 4% for consensus. Further out, our 2026 and long-run projection for the fed-funds rate and 10-year Treasury yield are 1.75% and 2.75%, respectively. We do, however, expect interest rates to dip below these levels in 2024 and 2025 as monetary policy leans accommodative.
- Inflation forecast. We project price pressures to swing from inflationary to deflationary by 2023, owing greatly to the unwinding of price spikes caused by supply constraints in durables, energy, and other areas. This will make the Fed’s job of curtailing inflation much easier. In fact, we think the Fed will overshoot its goal with inflation averaging 1.7% over 2023-26.
We do not recommend waiting that long to purchase. Mid-range homes are still going up in price and the money buyers will lose paying the additional appreciation will be far higher than the refinancing cost when rates come down again. Add to that there are rate buydown products that are fairly inexpensive - and can often be covered by the seller, and we begin to run out of reasons to wait a few years.
Central Banks are starting to take their foot off the brake-
Many of the central banks are starting to slow rate hikes to avoid a collision course with a recession in their respective countries
Canada – BoC hiked 50 instead of 75bp expected
Australia – RBA hiked 25bp instead of 50bp expected
Europe – ECB hiked 75bp yesterday and said they have made significant progress towards removing accommodation – may slow down hikes from here
US – After the Fed hikes 75bp in November, there is now greater chance the Fed only hikes 50bp in December