Wages are up. That’s good, but it could spark inflation. Inflation hurts mortgage rates.
Americans are making more money. That is good news for workers but bad news for borrowers.
When the economy does well, companies must pay more to retain and attract workers. That sounds good, and is for most people. Except for those shopping for mortgages.
Higher wages are a cost for companies, and they can choose to pass that cost on to customers, driving up the prices of everything from airlines to groceries.
Inflation is bad for mortgage rates, because it eats into investor returns on fixed-rate investments like mortgage bonds. When prices rise, mortgage-backed securities become worth less and less, so interest rates on those assets rise to keep investors buying. As with other kinds of inflation, those higher rates on mortgage-based assets are passed onto the consumer.
The last few months have seen a recent increase in wages, prompting some economists to wonder about future inflation. In January, wages crept up 2.9% from a year earlier. That is the fastest gain since the last economic boom.
$1.5 Trillion Infrastructure plan Revealed
A massive spending bill was rolled out in February, and impacts on mortgage rates will last through the spring.
The current administration wants to fix the country’s failing infrastructure with a program that won’t exactly be cheap. Currently, most of the government runs on borrowed money, so introducing extra spending measures will likely mean borrowing more. Issuing bonds is the way that the government borrows money.
Mortgage rates are based on a type of bond, so a bond-flooded market could mean higher rates on those assets to keep investors buying. In short, mortgage rates rise when the government borrows more. It’s unclear how much rates could rise as the spending bill progresses, but the plan itself is already making its impact on rates.
The new tax code is now law. What does that mean for interest rates?
Late last year, President Trump signed into law “the biggest [tax] cuts ever in the history of this country.” The new code brings numerous changes, some of which directly affect homeowners and home buyers.
For instance, you will no longer be able to write off unlimited property taxes (or state and local sales tax). Those items are now capped at $10,000. The mortgage interest deduction now only applies to the first $750,000 in mortgages, down from $1 million.
But those changes won’t necessarily affect mortgage rates themselves. What could affect them are the economic changes that come with the tax cuts.
First, the new tax code cuts the corporate tax from 35% to 21%. If all goes as the administration advertises, that cut could spark economic development. Corporations could focus on expansion and hiring with the newfound funds.
More workers who are getting paid more dollars could lead to higher inflation. As income increases, so does demand for goods and services. Bigger demand means prices throughout the economy could rise.
Inflation is bad for mortgage rates.
The average person could get a tax break as well, adding to economic growth. For instance, a person in the 25% tax bracket will see their tax reduced to 22%. Likewise the 15% tax bracket is now down to 12%. In real dollars, a married couple making $100,000 per year will see 3% more of their income, or $3,000, in 2018.
Multiply that by the millions of couples in that tax bracket, and it could add to economic expansion. That is, if those families decide to spend the money.
But increased inflation is not the only potential cause for higher mortgage rates.
Tax cuts: Former tax revenue has to come from somewhere
The tax plan will add hundreds of billions to $2 trillion to the federal deficit according to Investopedia. That debt would be financed by selling more Treasury bonds.
Treasury bond rates don’t guide mortgage rates, but another type of bond does: mortgage-backed securities.
More available means a decreased demand for bonds. Companies would have to raise rates to convince investors to buy. These higher rates would be passed on to the consumer in the form of higher mortgage rates.
So, should you take a “wait and see” attitude toward mortgage rates in 2018? Probably not. Now could be the time to lock in a rate in case these events push up rates this month.