Could Mortgages Be Causing Inflation?

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Sunsphere82
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Could Mortgages Be Causing Inflation?

Post by Sunsphere82 »

I read that as of June 2021, the Federal Reserve owned $2.35 trillion in mortgage backed securities.

Here is what I am pondering:
- Prior to 2008, a bank/lender reduced their holdings to loan money for a mortgage.
- Now, for many mortgages (indirectly), money is printed and introduced into the economy by the Fed to loan money for a mortgage.

Does that sound right?

And, if so, to say it another way, it seems the effect of new mortgates since 2008 has been to inject 2.35 trillion dollars into the economy. Has the inflationary effect - or perhaps disinflationary effect - of this stimulus been part of the reason of the long stock market run up? Should this be consideration to adjust my asset allocation to less stocks and more bonds or cash?
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steve r
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Re: Could Mortgages Be Causing Inflation?

Post by steve r »

Economist would say they are expanding the money supply. And yes, that is inflationary. More money chasing the same number (if not fewer) goods.

As to how to adjust your portfolio, many on BH say iBonds. There are a lot of inflation threads.
"Owning the stock market over the long term is a winner's game. Attempting to beat the market is a loser's game. ..Don't look for the needle in the haystack. Just buy the haystack." Jack Bogle
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Re: Could Mortgages Be Causing Inflation?

Post by RXfiles »

steve r wrote: Tue Dec 07, 2021 9:26 am As to how to adjust your portfolio, many on BH say iBonds. There are a lot of inflation threads.
I have a hard time getting behind the ibonds thing. If you're changing your AA for more ibonds and ibonds are 7% interest and the stock market is 30% yoy, isn't it a net negative? Obviously we don't know what's going to happen going forward but I'm not sure the fear of inflation is really an actionable event.
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Re: Could Mortgages Be Causing Inflation?

Post by Portfolio7 »

There are many components of inflation, and inflation is just one component of stock valuation. Do you think you can not only identify them all, but also when they will impact stocks prices? I don't think I can. This is why I invest in Index Funds. This is also why I determine my Stock/Bond AA based on generic historical risk, not on a point-in-time risk assessment, and not opportunity.

I suspect that MBS purchases were part of the mechanisms that yielded a huge jump in M2 a few months ago and appears to be mostly a result of monetary policy. That jump is in the process of reversing right now, as a result of fiscal policy. In between, we had some inflation. Stocks went, up, then down, then up, then down... I do think we had another good size bump during the inflationary months, and this recent pullback coincides nicely with the reduction of M2... but I also don't think it's always that neat. I haven't done a comparison of M2 to stock prices, but I'm sure a lot of people have, and if there was actionable intelligence there it would have already been arbitraged away. Nothing simple like that is going to miss the attention of the investing AI out there. That's my 2 cents, anyways, fwiw.
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Sunsphere82
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Re: Could Mortgages Be Causing Inflation?

Post by Sunsphere82 »

Thank you, Steve.
"Economist would say they are expanding the money supply. And yes, that is inflationary."
I've heard and read here that a mortgage is an inflation hedge. Perhaps now, at least in theory, one is just chasing his/her tail? - helping to create some inflation while trying to hedge against same?

Does Vanguard's total bond index hold any I bonds?
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Re: Could Mortgages Be Causing Inflation?

Post by exodusNH »

Sunsphere82 wrote: Tue Dec 07, 2021 9:40 am Does Vanguard's total bond index hold any I bonds?
No. They can only be held at Treasury Direct.
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Re: Could Mortgages Be Causing Inflation?

Post by exodusNH »

RXfiles wrote: Tue Dec 07, 2021 9:32 am
steve r wrote: Tue Dec 07, 2021 9:26 am As to how to adjust your portfolio, many on BH say iBonds. There are a lot of inflation threads.
I have a hard time getting behind the ibonds thing. If you're changing your AA for more ibonds and ibonds are 7% interest and the stock market is 30% yoy, isn't it a net negative? Obviously we don't know what's going to happen going forward but I'm not sure the fear of inflation is really an actionable event.
If you need to hold bonds, I Bonds are a useful component of that allocation.

I think much of the excitement about them this year is that this is the first bout of significant inflation that anyone under 50 has experienced and understood the experience. I do think that some are getting overly excited about 7% interest... But those people can get out of them in a year when the CPI adjustment has reverted to a more typical value.

Because of the yearly purchase limits, if you see value in them, you have to buy them even if you might not otherwise hold bonds.

They, along with EE bonds, offer additional tax-deferred space.
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Re: Could Mortgages Be Causing Inflation?

Post by Sunsphere82 »

by Portfolio7 » Tue Dec 07, 2021 10:36 am

There are many components of inflation, and inflation is just one component of stock valuation. Do you think you can not only identify them all, but also when they will impact stocks prices? I don't think I can. This is why I invest in Index Funds. This is also why I determine my Stock/Bond AA based on generic historical risk, not on a point-in-time risk assessment, and not opportunity.

I suspect that MBS purchases were part of the mechanisms that yielded a huge jump in M2 a few months ago and appears to be mostly a result of monetary policy. That jump is in the process of reversing right now, as a result of fiscal policy. In between, we had some inflation. Stocks went, up, then down, then up, then down... I do think we had another good size bump during the inflationary months, and this recent pullback coincides nicely with the reduction of M2... but I also don't think it's always that neat. I haven't done a comparison of M2 to stock prices, but I'm sure a lot of people have, and if there was actionable intelligence there it would have already been arbitraged away. Nothing simple like that is going to miss the attention of the investing AI out there. That's my 2 cents, anyways, fwiw.
Thank you. Very helpful.
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Re: Could Mortgages Be Causing Inflation?

Post by steve r »

Sunsphere82 wrote: Tue Dec 07, 2021 9:40 am Thank you, Steve.
"Economist would say they are expanding the money supply. And yes, that is inflationary."
I've heard and read here that a mortgage is an inflation hedge. Perhaps now, at least in theory, one is just chasing his/her tail? - helping to create some inflation while trying to hedge against same?

Does Vanguard's total bond index hold any I bonds?
Couple things. A mortgage is commonly thought of as an inflation hedge on this sight. I somewhat but firmly disagree. It is true that you payback the mortgage with inflated dollars, but the hedge is what you do with the borrowed money --- a home will likely go up in value loosely with with inflation. The home is the hedge. Buying some awesome stuff at BestBuy with a home loan, not so much an inflation hedge.

I bonds can only be bought directly from Treasury (and cannot be part of a retirement tax advantage plan.)
"Owning the stock market over the long term is a winner's game. Attempting to beat the market is a loser's game. ..Don't look for the needle in the haystack. Just buy the haystack." Jack Bogle
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steve r
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Re: Could Mortgages Be Causing Inflation?

Post by steve r »

exodusNH wrote: Tue Dec 07, 2021 10:01 am
RXfiles wrote: Tue Dec 07, 2021 9:32 am
steve r wrote: Tue Dec 07, 2021 9:26 am As to how to adjust your portfolio, many on BH say iBonds. There are a lot of inflation threads.
I have a hard time getting behind the ibonds thing. If you're changing your AA for more ibonds and ibonds are 7% interest and the stock market is 30% yoy, isn't it a net negative? Obviously we don't know what's going to happen going forward but I'm not sure the fear of inflation is really an actionable event.
If you need to hold bonds, I Bonds are a useful component of that allocation.

...
+1 iBonds make sense as a replacement for bonds according to BH who buy them. I would not suggest stocks for iBonds.

Historically, stocks as an inflation hedge is mixed at best. The 1970s were horrible decade for stocks. Since 1871, the correlation between inflation and stocks is 0.14 which is a touch more than neutral (Simba data on BH).
"Owning the stock market over the long term is a winner's game. Attempting to beat the market is a loser's game. ..Don't look for the needle in the haystack. Just buy the haystack." Jack Bogle
exodusNH
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Re: Could Mortgages Be Causing Inflation?

Post by exodusNH »

steve r wrote: Tue Dec 07, 2021 3:49 pm
Sunsphere82 wrote: Tue Dec 07, 2021 9:40 am Thank you, Steve.
"Economist would say they are expanding the money supply. And yes, that is inflationary."
I've heard and read here that a mortgage is an inflation hedge. Perhaps now, at least in theory, one is just chasing his/her tail? - helping to create some inflation while trying to hedge against same?

Does Vanguard's total bond index hold any I bonds?
Couple things. A mortgage is commonly thought of as an inflation hedge on this sight. I somewhat but firmly disagree. It is true that you payback the mortgage with inflated dollars, but the hedge is what you do with the borrowed money --- a home will likely go up in value loosely with with inflation. The home is the hedge. Buying some awesome stuff at BestBuy with a home loan, not so much an inflation hedge.

I bonds can only be bought directly from Treasury (and cannot be part of a retirement tax advantage plan.)
It is a valid assumption IF your income goes up with inflation. If it doesn't, you're relying on whatever meager tax benefits you can get now and the asset increasing in price.

Assuming a fixed-rate mortgage, you do get protection from housing cost inflation (unless you needed a new roof in 2021 -- sigh!). But that only holds if you don't change houses every few years.
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Re: Could Mortgages Be Causing Inflation?

Post by Jack&Warren disciple »

Sunsphere82 wrote: Tue Dec 07, 2021 9:04 am I read that as of June 2021, the Federal Reserve owned $2.35 trillion in mortgage backed securities.

Here is what I am pondering:
- Prior to 2008, a bank/lender reduced their holdings to loan money for a mortgage.
- Now, for many mortgages (indirectly), money is printed and introduced into the economy by the Fed to loan money for a mortgage.

Does that sound right?

And, if so, to say it another way, it seems the effect of new mortgates since 2008 has been to inject 2.35 trillion dollars into the economy. Has the inflationary effect - or perhaps disinflationary effect - of this stimulus been part of the reason of the long stock market run up? Should this be consideration to adjust my asset allocation to less stocks and more bonds or cash?
Both fiscal and monetary policy have inflated the money supply and families balance sheets are generally more flush with cash than prepandemic. Americans love to buy stuff and services. Since consumer spending is approximately 2/3 of GDP, there is upward pressure on CPI since labor participation is low, demand is strong, and logistics problems are straining supply.

1/3 of new mortgage originations are for home purchases (only 10% are new homes) 2/3 are mortgage refinancing at lower interest rates with some of that being borrowers (i.e., mortgagors) doing cash out refinancing, some of which will be new consumer spending (i.e., higher education, home improvements, new autos and vacations, pay down credit cards, etc.).

Easy monetary and fiscal policies generally are inflationary BUT savers have been punished in the form of negative real yields for quite some time now. This makes owning real estate and equities more attractive and may or may not be creating a bubble. Both stocks and real estate have seen annual returns well above their historical norms. The only problem with cash and bonds is that you are paying an insurance price to do so with negative real yields. Quite the conundrum isn't it?
Last edited by Jack&Warren disciple on Tue Dec 07, 2021 10:19 pm, edited 1 time in total.
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Re: Could Mortgages Be Causing Inflation?

Post by ClassII »

steve r wrote: Tue Dec 07, 2021 3:49 pmCouple things. A mortgage is commonly thought of as an inflation hedge on this sight. I somewhat but firmly disagree. It is true that you payback the mortgage with inflated dollars, but the hedge is what you do with the borrowed money --- a home will likely go up in value loosely with with inflation. The home is the hedge. Buying some awesome stuff at BestBuy with a home loan, not so much an inflation hedge.

Seems to me a mortgage is an inflation hedge for the homebuyer but inversely inflationary on a macro level. And like you said it all depends on what you do with the mortgage as far as wealth building (more on that below). If mortgages didn't exist buying a home would be VERY difficult and thus prices would likely fall to a level that would make the whole process work and also likely there would be a lot more renters. Like going back to the days of Baron landowners and feudal serfs. Same goes for periods of high interest rates or high property tax as people really don't care what the actual price of the house is, they're only interested in the monthly payment. If I can afford $2,000/mo then I'll buy whatever PITI gets me to that number, regardless of how much of it goes in to P, I, T, or I. So if interest rates suddenly drop, I goes down and so it's likely P will go up which seems to be the case every time interest rates drop on mortgages. Thus across the country when that happens inflation in house prices occurs but are Americans really spending more on their mortgages (I mean, yes, we're spending a lot more on housing than we did 30 years ago as a percentage of income but is that lined up perfectly with the price of houses?).

But your point about using a mortgage to buy more garbage at Best Buy is quite appropriate. The Bogglehead way would be buying a home in 2010 and steadily refinancing the existing principal all along the way thus lowering your monthly payment (or even better, pay it off earlier and earlier). Take whatever savings in the monthly payment and put it into VTSAX, etc etc. The classic American Dream method is to cash out refinance or keep moving up to ever larger homes with whatever equity you've accumulated. In that scenario you're not really gaining wealth just looking like you are.
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Re: Could Mortgages Be Causing Inflation?

Post by moneyflowin »

Is water wet?

If mortgages didn't exist at all, the median home would not sell for $350k. They'd sell for $80k if that. While affordability and home ownership rate likely would remain constant, the price of houses would adjust to the amount of cash the median homebuyer has on hand.

Borrowing money to buy an asset is always inflationary, whether it's a mortgage or a margin loan. Mortgages cause price inflation in real estate.

Looked at another way -- in a fractional reserve system, money supply expands from lending. Mortgages are a significant source of lending. Since it causes money supply to grow, it's inflationary
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Re: Could Mortgages Be Causing Inflation?

Post by Sunsphere82 »

Jack&Warren disciple wrote: Tue Dec 07, 2021 4:25 pm
Sunsphere82 wrote: Tue Dec 07, 2021 9:04 am I read that as of June 2021, the Federal Reserve owned $2.35 trillion in mortgage backed securities.

Here is what I am pondering:
- Prior to 2008, a bank/lender reduced their holdings to loan money for a mortgage.
- Now, for many mortgages (indirectly), money is printed and introduced into the economy by the Fed to loan money for a mortgage.

Does that sound right?

And, if so, to say it another way, it seems the effect of new mortgates since 2008 has been to inject 2.35 trillion dollars into the economy. Has the inflationary effect - or perhaps disinflationary effect - of this stimulus been part of the reason of the long stock market run up? Should this be consideration to adjust my asset allocation to less stocks and more bonds or cash?
Both fiscal and monetary policy have inflated the money supply and families balance sheets are generally more flush with cash than prepandemic. Americans love to buy stuff and services. Since consumer spending is approximately 2/3 of GDP, there is upward pressure on CPI since labor participation is low, demand is strong, and logistics problems are straining supply.

1/3 of new mortgage originations are for home purchases (only 10% are new homes) 2/3 are mortgage refinancing at lower interest rates with some of that being borrowers (i.e., mortgagors) doing cash out refinancing, some of which will be new consumer spending (i.e., higher education, home improvements, new autos and vacations, pay down credit cards, etc.).

Easy monetary and fiscal policies generally are inflationary BUT savers have been punished in the form of negative real yields for quite some time now. This makes owning real estate and equities more attractive and may or may not be creating a bubble. Both stocks and real estate have seen annual returns well above their historical norms. The only problem with cash and bonds is that you are paying an insurance price to so with negative real yields. Quite the conundrum isn't it?
Yes, quite the conundrum.
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Re: Could Mortgages Be Causing Inflation?

Post by Watty »

steve r wrote: Tue Dec 07, 2021 9:26 am Economist would say they are expanding the money supply. And yes, that is inflationary. More money chasing the same number (if not fewer) goods.
It is also important to remember that there are several different types of inflation including;

Monetary inflation, the increase of the money supply.
Price Inflation, measured by the CPI
Wage inflation, wages going up.

These do not always change at the same rates or for the same reasons. For example prices may be going up because of the supply change issues but that does not mean that wages will go up to match that.

In the 1970 there was the infamous "stagflation" where prices were going up but wages were stagnate.

It gets complicated real quick and the original question, "Could Mortgages Be Causing Inflation?", is a good one to ask but it could be the topic of a Phd. thesis.
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Re: Could Mortgages Be Causing Inflation?

Post by JoMoney »

Low interest rates and easy money policies by the Fed make mortgages at low interest rates available.

Another factor for that, is in the U.S. the government has several initiatives, programs, and even created enterprises like Fannie Mae to participate in the mortgage lending market and effectively subsidize them. 30 year fixed-rate mortgages wouldn't be a thing without government involvement.
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Re: Could Mortgages Be Causing Inflation?

Post by finite_difference »

moneyflowin wrote: Tue Dec 07, 2021 8:40 pm Is water wet?

If mortgages didn't exist at all, the median home would not sell for $350k. They'd sell for $80k if that. While affordability and home ownership rate likely would remain constant, the price of houses would adjust to the amount of cash the median homebuyer has on hand.

Borrowing money to buy an asset is always inflationary, whether it's a mortgage or a margin loan. Mortgages cause price inflation in real estate.

Looked at another way -- in a fractional reserve system, money supply expands from lending. Mortgages are a significant source of lending. Since it causes money supply to grow, it's inflationary
No, if there were no mortgages, house prices would not fall by 5 times. What would happen is that people would start to hoard cash so they could buy a home in cash. Like they do in China. (Spoiler: home prices are not cheap in China.)

Encouraging people to hoard cash means they won’t be investing it in stocks. So that will negatively impact the stock market.

If interest rates go up, then the purchase price of homes could fall, since they become less affordable. But that’s balanced somewhat by the presence of a strong economy.

Money supply and inflation haven’t been that tightly linked for a long time now, which Powell recently pointed out:

“The connection between monetary aggregates and either growth or inflation was very strong for a long, long time, which ended about 40 years ago …. It was probably correct when it was written, but it’s been a different economy and a different financial system for some time.”

For more discussion on money supply and growth:

https://www.nytimes.com/2021/12/03/opin ... upply.html

So while Powell was right in saying that the correlation between money and growth broke down after 1980, monetarism — roughly speaking, the doctrine that says the money supply rules everything — was never supported by the evidence.
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Sunsphere82
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Re: Could Mortgages Be Causing Inflation?

Post by Sunsphere82 »

Watty wrote: Tue Dec 07, 2021 10:44 pm
steve r wrote: Tue Dec 07, 2021 9:26 am Economist would say they are expanding the money supply. And yes, that is inflationary. More money chasing the same number (if not fewer) goods.
It is also important to remember that there are several different types of inflation including;

Monetary inflation, the increase of the money supply.
Price Inflation, measured by the CPI
Wage inflation, wages going up.

These do not always change at the same rates or for the same reasons. For example prices may be going up because of the supply change issues but that does not mean that wages will go up to match that.

In the 1970 there was the infamous "stagflation" where prices were going up but wages were stagnate.

It gets complicated real quick and the original question, "Could Mortgages Be Causing Inflation?", is a good one to ask but it could be the topic of a Phd. thesis.
I see that mortgages could always have influenced inflation and housing prices, for ex. When 30 yr loans began to be offered when previously only 15 or 20 yr loans were available. My intention was to ask if mortgages since 2008 since the Fed has been buying them has done so, perhaps more so. But I can see I was looking with tunnel vision while asking that. Yes, it get’s complicated quickly.
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Re: Could Mortgages Be Causing Inflation?

Post by Jack&Warren disciple »

JoMoney wrote: Tue Dec 07, 2021 10:51 pm Low interest rates and easy money policies by the Fed make mortgages at low interest rates available.

Another factor for that, is in the U.S. the government has several initiatives, programs, and even created enterprises like Fannie Mae to participate in the mortgage lending market and effectively subsidize them. 30 year fixed-rate mortgages wouldn't be a thing without government involvement.
Good point. As a matter of fact 1 of the causes of the Great Depression was that American homeowners only could get mortgages with a 5 year balloon payment due. Imagine the bank coming to you after 5 years and asking for you to pay the entire unpaid principal balance! In 1938 the FDR administration created Fannie Mae as a federal government agency to buy mortgages from banks and the 30 year PREPAYABLE AT ANY TIME WITHOUT PENALTY fixed rate mortgage was born!

In 1968, LBJ due to the inflationary effects of his Great Society plan and escalating spending from the Vietnam war, privatized Fannie Mae. Freddie Mac was created in 1972. Today they guarantee over $7.2 trillion in American home mortgages, without a dime showing up as a liability on the federal government balance sheet.

Hardly any other countries have this system. When I was in Greece on my honeymoon in 00, I saw various homes being built but it would take years to accomplish as they could only be built in stages as the families saved up enough money for each stage of construction.
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Re: Could Mortgages Be Causing Inflation?

Post by Socal77 »

I don't know but count yourself lucky if you had a 30 year fixed in the last decade or so because those of us without are getting financially dominated and spanked with rising rents.

OER has and will make actually inflation rates above target for some time it seems.
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Re: Could Mortgages Be Causing Inflation?

Post by Socal77 »

Socal77 wrote: Wed Dec 08, 2021 10:15 am I don't know but count yourself lucky if you had a 30 year fixed in the last decade or so because those of us without are getting financially dominated and spanked with rising rents. I'm very unhappy with this.

OER has and will make actually inflation rates above target for some time it seems.
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Re: Could Mortgages Be Causing Inflation?

Post by inbox788 »

RXfiles wrote: Tue Dec 07, 2021 9:32 amI have a hard time getting behind the ibonds thing. If you're changing your AA for more ibonds and ibonds are 7% interest and the stock market is 30% yoy, isn't it a net negative? Obviously we don't know what's going to happen going forward but I'm not sure the fear of inflation is really an actionable event.
Inflation fear is totally actionable. It directly impacts your choice of AA as well as how to deploy the bonds allocation (iBonds, TIPS, etc.). Whether you should act is a different question altogether.

As far as mortgage, I don't think the Fed holding the mortgages has as much to do with inflation as the market forces and mortgages themselves. If you look at the originations, it has been a lot higher recently.

https://www.statista.com/statistics/205 ... ince-1990/

But a deeper look reveals that a lot of the originations are refinance activity and not new purchases, so if you believe refinance events are pretty much a wash, new originations have only grown somewhat.

https://www.statista.com/statistics/275 ... ed-states/

OP, I'm not seeing the mortgage and inflation connection, but does inflation expectation or fear determine whether you get fixed or variable mortgage or pay down your mortgage vs investing? How so?
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Re: Could Mortgages Be Causing Inflation?

Post by Jack&Warren disciple »

"OP, I'm not seeing the mortgage and inflation connection, but does inflation expectation or fear determine whether you get fixed or variable mortgage or pay down your mortgage vs investing? How so?"

“Best I can tell, the adjustable-rate mortgage system is frozen,” says Lou Barnes, a loan originator at Premier Mortgage Group in Boulder, Colorado. “We’ve been notified there are no adjustable-rate mortgages to lock.”

https://www.bankrate.com/mortgages/arms ... ge-market/

With 15 yr and 30 year fixed rate mortgages, PREPAYABLE AT ANY TIME WITHOUT PENALTY, at 50 year lows, why would anyone get an ARM?

https://www.frbsf.org/economic-research ... e-pricing/
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Re: Could Mortgages Be Causing Inflation?

Post by ZWorkLess »

RXfiles wrote: Tue Dec 07, 2021 9:32 am
steve r wrote: Tue Dec 07, 2021 9:26 am As to how to adjust your portfolio, many on BH say iBonds. There are a lot of inflation threads.
I have a hard time getting behind the ibonds thing. If you're changing your AA for more ibonds and ibonds are 7% interest and the stock market is 30% yoy, isn't it a net negative? Obviously we don't know what's going to happen going forward but I'm not sure the fear of inflation is really an actionable event.
For me, it's not changing my AA, it's moving some money away from the bond index fund and into I bonds. Same AA, just moved some $$ from Total Bond to I bonds. I imagine most Bogleheads use them the same way.

There's also a nice advantage of tax-deferral, which is important for me as most of our retirement assets will ultimately be in taxable accounts, meaning I'll likely want to have some bonds in taxable, and so I bonds give me the ability to defer taxes outside the official tax deferred accounts. Since our only tax deferred account we can currently fund is one SIMPLE IRA (about 20k max per year, employer match included), adding the 20k in I bonds effectively doubles our tax-deferred space for new funds.
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Sunsphere82
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Re: Could Mortgages Be Causing Inflation?

Post by Sunsphere82 »

Jack&Warren disciple wrote: Wed Dec 08, 2021 9:59 am
JoMoney wrote: Tue Dec 07, 2021 10:51 pm Low interest rates and easy money policies by the Fed make mortgages at low interest rates available.

Another factor for that, is in the U.S. the government has several initiatives, programs, and even created enterprises like Fannie Mae to participate in the mortgage lending market and effectively subsidize them. 30 year fixed-rate mortgages wouldn't be a thing without government involvement.
Good point. As a matter of fact 1 of the causes of the Great Depression was that American homeowners only could get mortgages with a 5 year balloon payment due. Imagine the bank coming to you after 5 years and asking for you to pay the entire unpaid principal balance! In 1938 the FDR administration created Fannie Mae as a federal government agency to buy mortgages from banks and the 30 year PREPAYABLE AT ANY TIME WITHOUT PENALTY fixed rate mortgage was born!

In 1968, LBJ due to the inflationary effects of his Great Society plan and escalating spending from the Vietnam war, privatized Fannie Mae. Freddie Mac was created in 1972. Today they guarantee over $7.2 trillion in American home mortgages, without a dime showing up as a liability on the federal government balance sheet.

Hardly any other countries have this system. When I was in Greece on my honeymoon in 00, I saw various homes being built but it would take years to accomplish as they could only be built in stages as the families saved up enough money for each stage of construction.
Really interesting information. Thx
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Sunsphere82
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Re: Could Mortgages Be Causing Inflation?

Post by Sunsphere82 »

inbox788 wrote: Wed Dec 08, 2021 1:56 pm
RXfiles wrote: Tue Dec 07, 2021 9:32 amI have a hard time getting behind the ibonds thing. If you're changing your AA for more ibonds and ibonds are 7% interest and the stock market is 30% yoy, isn't it a net negative? Obviously we don't know what's going to happen going forward but I'm not sure the fear of inflation is really an actionable event.
Inflation fear is totally actionable. It directly impacts your choice of AA as well as how to deploy the bonds allocation (iBonds, TIPS, etc.). Whether you should act is a different question altogether.

As far as mortgage, I don't think the Fed holding the mortgages has as much to do with inflation as the market forces and mortgages themselves. If you look at the originations, it has been a lot higher recently.

https://www.statista.com/statistics/205 ... ince-1990/

But a deeper look reveals that a lot of the originations are refinance activity and not new purchases, so if you believe refinance events are pretty much a wash, new originations have only grown somewhat.

https://www.statista.com/statistics/275 ... ed-states/

OP, I'm not seeing the mortgage and inflation connection, but does inflation expectation or fear determine whether you get fixed or variable mortgage or pay down your mortgage vs investing? How so?
Thank you for your insight and information. I don’t have a mortgage or need one, so there’s nothing to do in that regard. I’m thinking of retiring in a year and a half, mid-fifties (fed govt) and the unknowns involved in that make me a bit nervous, as does the effect of inflation in general.
TPIR
Posts: 106
Joined: Fri Nov 01, 2019 6:12 pm

Re: Could Mortgages Be Causing Inflation?

Post by TPIR »

Sunsphere82 wrote: Tue Dec 07, 2021 9:04 am I read that as of June 2021, the Federal Reserve owned $2.35 trillion in mortgage backed securities.

Here is what I am pondering:
- Prior to 2008, a bank/lender reduced their holdings to loan money for a mortgage.
- Now, for many mortgages (indirectly), money is printed and introduced into the economy by the Fed to loan money for a mortgage.

Does that sound right?

And, if so, to say it another way, it seems the effect of new mortgates since 2008 has been to inject 2.35 trillion dollars into the economy. Has the inflationary effect - or perhaps disinflationary effect - of this stimulus been part of the reason of the long stock market run up? Should this be consideration to adjust my asset allocation to less stocks and more bonds or cash?
Separately, cash out via cash out refi and heloc consolidation has ramped up to 2007 levels. That was the last time inflation reached mid single digits yoy. Not clear if this is a factor, but in terms of excess cash for spending, it unlocks more.

https://twitter.com/RickPalaciosJr/stat ... 6287968260
TurtleBeatsHare
Posts: 121
Joined: Fri Jun 25, 2021 2:01 pm

Re: Could Mortgages Be Causing Inflation?

Post by TurtleBeatsHare »

In reality, yes. There’s a direct correlation between mortgage interest rates, monthly carrying cost, approvability of the mortgage, and purchase price. However, because of the way in which housing is included in the price indices used to calculate inflation—you by and large don’t see the increase in housing prices in the CPI. If you want to get into the weeds, search for owner equivalent rent or skim this article: https://www.google.com/amp/s/www.market ... umbers/amp

I’m less familiar with PCE’s methodology, but the primary difference between CPI inflation and PCE inflation is that the latter index allows for substitution between products as prices increase. A 5% increase in beef would be a 5% increase in CPI; but PCE accounts for you substituting away from beef towards chicken, which might only have a 2% price increase. I’d have to learn more whether the index attempts to measure actual substitution among consumers based on actual behavior, or whether it assumes complete substitution to the lower price product, etc. But because of that substitution, I suspect it would not look at the cost of housing but instead rental rates.
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