The REconomy Podcast™: What does it mean when mortgage rates are less than the rate of inflation?

In this episode of the REconomy Podcast™ from First American, Chief Economist Mark Fleming and Deputy Chief Economist Odeta Kushi examine the extremely rare phenomenon of real, negative mortgage rates – when the average 30-year, fixed mortgage rate is less than the rate of inflation – and explain what it means for the housing market.

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Listen to the REconomy Podcast Episode 35:


“There have only been two other times when core inflation was higher than the 30-year, fixed mortgage rate. Both of those were in the 1970s. Today, we're experiencing the extremely rare phenomenon of real, negative mortgage rates. So, while we may expect rising mortgage rates to cool the market, real estate still looks cheap, given the high inflation, not to mention the appreciation benefits that people get from the stellar asset returns that we've experienced recently.” – Mark Fleming, chief economist at First American


Odeta Kushi - Hello and welcome to episode 35 of the REconomy podcast, where we discuss economic issues that impact real estate, housing and affordability. I'm Odeta Kushi, deputy chief economist at First American and here with me is Mark Fleming, chief economist at First American. Hey Mark, lots going on in the housing market and the overall economy. But the string that ties it all together is interest rates. The Federal Reserve recently announced a 25-basis point rate hike at that March FOMC meeting, the first of as many as seven rate hikes anticipated for this year. And in the mortgage market, the 30-year, fixed mortgage rate has increased almost a full percentage point from the beginning of the year. That's right. Rates started the year at about 3.2%. And in the week ending March 17. Rates were about 4.2%. That's a lot of change.

Mark Fleming - Hi, Odeta. It sure is. And I've even read some reports of lenders quoting 30-year mortgages at 5% with no points. This is, by the way, a good time to inform those that don't already know. It's always wise to shop around for mortgage rates, it could make a big difference, as much as half a point, as you suggest right here. So, the 30-year, fixed mortgage rate is rising quickly. But, interestingly enough, the 10-year Treasury yield has not increased nearly as fast.

Odeta Kushi - That's exactly right, Mark. And, if you're a regular listener to our podcast, you'll know why this matters for mortgage rates. But, if you're a newbie, a quick refresher. The popular 30-year, fixed mortgage rate is loosely benchmarked to the 10-year Treasury bond. When global investors sense increased uncertainty, there's a flight to safety in U.S. Treasury bonds, which causes their price to go up and their yield to go down. The opposite is true when the economy is improving, and prolonged higher inflation and Fed tightening also drive down bond prices and increase yields. Now, since the end of the Great Recession, the 30-year, fixed mortgage rate has, on average, been about 1.7 percentage points, that's 170 basis points, above the 10-year Treasury bond yield.

Mark Fleming - Well, last I checked, the 10-year Treasury yield was at about 2.16%. And here, I like Odeta's attention to significant digit detail because it matters. Hundreds of a percent matter when we're talking about the 10-year Treasury yield. While the 30-year, fixed mortgage rate was at about 4.16%. But a 1.7 percentage point difference, aka "the spread." Now I'm wondering where that term came from. But, but I digress, "the spread" implies a rate of about 3.9% for the 30-year, fixed mortgage rate in the most recent MBA data for the week ending March 18. The data show that the 30-year, fixed mortgage rate was 4.5%. Some quick math. That's 2.3 percentage points above the 10-year Treasury yield. Not to mention that a 4.5% 30-year, fixed mortgage rate is the highest rate since March of 2019. Odeta, why is "the spread" between the Treasury bond and the mortgage rate growing?

Odeta Kushi - You mean, to use the finance lingo, why is the spread widening? Well, one potential reason is that mortgage-backed securities or MBS investors expect more aggressive action from the Fed in the coming year and they've already factored in those future interest-rate increases, whereas the 10-year Treasury is a little slower to change.

Mark Fleming - Right, the 10-year Treasury is influenced by all sorts of factors, not just domestic inflation expectations. While the 10-year Treasury yield did surge in response to Federal Reserve Chairman Powell's remarks pointing to a tighter monetary policy regime, investors from around the globe are still responding to developments in Ukraine. And the ongoing uncertainty there is putting downward pressure on the 10-year yield. This flight to safety, as you mentioned earlier. And, at the same time, the Fed has stopped buying mortgage-backed securities, aka quantitative easing, which is direct intervention in the mortgage market. They've gone one step further and at the latest meeting are now hinting that it may actively sell mortgage-backed securities, aka the exact reverse of quantitative easing. So direct dis-intervention, if you will, in the mortgage market. I know that's not a word. Well, it certainly puts the pressure on mortgage rates to rise, regardless of what's happening to the 10-year Treasury yield. So voila, widening spreads.

Odeta Kushi - And let's not forget that the reason for the tighter monetary policy is to bring inflation back down to earth. But I'm curious how mortgage rates are stacking up to inflation today.

Mark Fleming - That's a great question, Odeta. And when we subtract the core CPI inflation rate from the 30-year, fixed mortgage rate, we find that, with air quotes here, mortgage rates are actually negative.

Odeta Kushi - Say what now? Here we're talking about rates as high as 5%. And now you're telling me rates are negative?

Mark Fleming - Yep, over the last half century, there have only been two other times when core inflation was higher than the 30-year, fixed mortgage rate. Both of those were in the 1970s. Today, we're experiencing the extremely rare phenomenon of real, negative mortgage rates. So, while we may expect rising mortgage rates to cool the market, real estate still looks cheap, given the high inflation, not to mention the appreciation benefits that people get from the stellar asset returns that we've experienced recently. Okay, thinking like a finance guy for a hot minute here. If the price of everything is rising faster than the price of borrowing at a fixed rate, aka the negative real rate of mortgages, to own an asset that's appreciating in value. Hmmm.

Odeta Kushi - Yeah, so a significant slowdown in purchase demand due to rising mortgage rates is not necessarily a foregone conclusion, not to mention that house prices, and even sales to a lesser extent, have shown to be pretty resilient in the face of rising mortgage rates. You can refer to our podcast episode 15, if you want to know more about this. But the SparkNotes version is in four of the last six rising mortgage rate eras existing-home sales increased or only declined after prolonged resistance. Home prices show even more resiliency. Apart from the 1994 rising-rate period when house prices declined slightly and briefly, house prices have always continued to rise, albeit more slowly, when rates have increased. That's because home sellers would rather withdraw from the market, rather than sell at lower prices, a phenomenon we refer to as 'downside sticky.' Of course, relative rates matter and mortgage rates have been in the 2-to-3% range during most of the pandemic. So, rising to about 4% may have a larger impact than in the earlier periods. So, it's unclear how much rising rates will cool the purchase market. But, how would rising rates cool the housing market anyway? By reducing affordability, of course, and causing buyers to pull back from the market. In other words, by cooling demand. So, what exactly are we seeing with affordability today?

Mark Fleming - Well, affordability is down compared with one year ago. In fact, our latest Real House Price Index report reflecting January of 2022 data indicates that the RHPI jumped by nearly 27% compared with a year ago. That's the fastest growth rate since 2004. Recall that the growth in the RHPI signals declining affordability. They are inverses of each other. But less affordability compared with a year ago is not necessarily the same as simply less affordable.

Odeta Kushi - I feel a history lesson coming.

Mark Fleming - Ah, yes, we do like our history here. There's no denying that affordability is down compared with one year ago, but historical context is key. Nationally, real house-buying power-adjusted house prices remained 29% below the peak in April of 2006 before the housing crash. While consumer house-buying power declined in January of this year, it remains near record levels and is more than double the level it was at the time of April 2006. Thanks to higher household income and significantly lower mortgage rates. Household incomes, in fact, today are nearly 48% greater than they were in April of 2006. And the average mortgage rate is over 3 percentage points below where it was even at 3 and change or 4%. Remember, in 2006, interest rates were 6% and above. In fact, real house prices nationally are at the same level they were more than two decades ago at the turn of the millennium. I've always wanted to use that word in a real estate economics podcast.

Odeta Kushi - Listener you can't see my eye-roll, but it is happening. And, of course, we all know real estate is local. So, we repeated the analysis looking at the top 50 markets in the U.S. And, what we found is that while for nominal house prices, all 50 markets we track in the RHPI have surpassed their previous housing price peaks. But nominal house prices don't tell the whole affordability story. Nominal house prices have increased, but house--buying power has also increased because of a long-run decline in mortgage rates and the slow, but steady growth of household income. So, according to our house-buying power-adjusted RHPI, homes are 34% more affordable on average across all 50 markets than their respective RHPI peaks. While the supply-demand imbalance in today's housing market continues to fuel strong house price appreciation across the country, the dramatic increase in house-buying power relative to 2006, driven by lower mortgage rates and higher incomes, has more than made up for it. In fact, in four cities homes are more than 50% more affordable today than at their prior RHPI peak. And the market where affordability has improved the most since its prior peak is very close to home.

Mark Fleming - Actually, it is home. That's right, Washington D.C.

Odeta Kushi - Yep, Washington D.C., home of the cherry blossoms, for at least for another couple weeks. But I digress. Homes are less affordable than they were a year ago, but nationally and in most markets they remain much more affordable than at the peak of the 2006 housing boom. House prices are widely expected to continue to increase, although at a slower pace. and mortgage rates are likely to rise. So, it's likely that affordability will decline further, but in most markets, we're still a long way from the mid-2000s boom. Alright, well that's it for this week's episode. Thank you for joining us on this episode of the REconomy podcast. If you have an economics-related question you'd like us to feature in a future episode, you can email us at We love to hear from our listeners. And if you can't wait for the next episode, you can follow us on Twitter. It's @OdetaKushi for me and @MFlemingEcon for Mark. Until next time.

This transcript has been edited for clarity.



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