Biggest Mortgage Gap in Twenty Years

Jeffrey Roach (00:04):

Hi, I'm Jeffrey Roach, chief economist for LPL Financial. And in this edition, I'll highlight three key factors at play in the global economy. First, inflation fog lingers on. Earlier this year, we were in a good spot. Inflation was easing up, as you can see with the February data, and investors anticipated a Goldilocks economy. But the inflation dashboard is turning red again after those head-fakes mid-summer. Investors are stumbling through an inflation fog and squinting for signals in a batch of data that could reveal a growing economy despite the growing inflation pressures. The challenge for markets is it's hard to tell whether the Fed will be forced to raise rates by another 25 basis points amid a bond sell-off and rising fiscal debt. That kind of uncertainty could make investors more cautious about the months ahead. Second, U.S. Dollar supported by tighter policy. The dollar gained against most of the group of 10 peers as investors sought shelter from the still unresolved standoff between Washington and Tehran.

Jeffrey Roach (01:05):

After the Fed raised rates to a range between 3.75 and 4% on September 16, its first hike, by the way, since 2023, the tone at the press conference was hawkish. Chair Kevin Warsh argued financial conditions still aren't restrictive enough, dismissed the idea that inflation is merely an oil shock artifact, and effectively took the one and done narrative off the table. The bond market took the hint, and as of today, September 28, the 10-year Treasury yield is 5.2%, its highest level in over 20 years, and the dollar index has followed, climbing back above 101 and closing in on its year-to-date high. What makes this rally different from earlier bouts of dollar strength is that it's being driven by two forces, and they're pulling in the same direction at once. A genuinely hawkish Fed repricing with traders now pricing in good odds of additional hikes before year-end, layered on top of still-simmering geopolitical risk, from that keeps a safe haven bid for the dollar.

Jeffrey Roach (02:09):

Third, we have the biggest mortgage gap in 40 years. The lock-in effect continues to freeze the U.S. housing market, as roughly 20% of homeowners today are sitting on mortgage rates below 3%, a historically rare deal locked in during the 2020 and 2022 low-rate window. With the gap between homeowners' effective rates and today's new mortgage rates now the widest in 20 years, the math simply doesn't work for most would-be sellers. So on a $400,000 home, trading a 3% rate for a 7% one could add nearly $1,000 to the monthly payment. This dynamic is hindering housing activity and could suppress sales and broader economic dynamism for years until that rate gap narrows. Well, that's all for now. If you want more insights, follow us on social media and take care.