A note on mortgage rates & inflation

This is where mortgage banking and residential real estate overlap w/macroeconomics & money mgt. 

First, a disclaimer. I am not a real estate agent or broker. 

However, understanding some basics around calculating risk, probability, and applying to personal money management/financial decisions:

1. I wouldn't be buying a house right now until prices adjust from the shock of the RATE OF CHANGE of the moves in rates. Understand the magnitude.

2. I would not be taking out 3/1 or 5/1 ARM's (Adjustable-Rate Mortgages) for a 25-50bp (basis points) discount (0.25%-0.50% discount) banking on the idea that mortgage rates have to be lower in 3-5 years (b/c Fed is going to pivot & lower rates ad infinitum).

Inflation: We don't know what the 3-10 yr effect on inflation will be, given this massive shift in globalization, supply disruptions (see the latest in rice & grains) + moves in oil production + geopolitical unknowns in the face of current cold & hot wars on multiple fronts w/multiple "adversaries".

It's simple thesis to believe that "well, we tamed inflation! rates will go down now. time for deflation!". And it's a thesis that serves one's own book (aka the need to be right, aka intertwined with ego).

We're likely to see a higher inflation print for July given higher prices in things like copper, oil, grains (data will come in Aug, so let's revisit). And while probability has inflation cooling again + the possibility that we could get Fed rate cuts into '24 if economic conditions continue to weaken (stock markets are not "the economy"), we cannot rule out continued inflationary pressures later. No, this is not the 1970's. However, inflationary periods tend to move in waves. Think of head-fakes and rebounds.

I would not stake a 3/1 or 5/1 on paying this higher fixed rate thinking that you're saving money for now and surely getting a lower adjustable in a few years.

This also leads to the sort of money behavior that says "well if we just stretch this budget to afford...". Lenders will factor your lower payment into your DTI (Debt-To-Income). But thus can get you into trouble by spending above your means.

3/1's and 5/1's can work if you're not planning to live in the home longer than those time frames. And you can refinance, although you should factor in the fees/costs associated.

Wait it out if you can. Prices haven't fully realized the shock of more expensive lending. Many people are sitting in their homes with low mortgage rates and have no options as replacement. More inventory is coming in the form of new builds. And then we have the issue of investment homes that were purchased for short-term/AirBnB rentals, but are sitting empty most of the time not generating revenue. People took out HELOC's to purchase them.

If you can't wait, find a payment that works at fixed. You can refinance later if rates come down considerably.

Others will disagree & take issue. There's no right or wrong way. It depends of course on your situation.