Contra this comment, the data suggests otherwise.
Figure 1: 15 year fixed mortgage rate adjusted by 10 year SPF median expected inflation (blue +), 15 year after tax fixed mortgage rate adjusted by 10 year SPF median expected inflation (tan square), 15 year after tax fixed mortgage rate adjusted by Cleveland Fed 15 year expected inflation (green line), all in %. After-tax calculation uses maximum marginal tax rate. NBER defined peak-to-trough recession dates shaded gray. Source: Freddie Mac via FRED (series MORTGAGE15US), Philadelphia Fed Survey of Professional Forecasters, Cleveland Fed, NBER, and author’s calculations.
These calculations seem to indicate mortgage rates, even for the highest tax brackets, are now solidly in the positive region.
It took Jonny boy a while to get around to tell us his assumptions. Nominal mortgage rate = 6.3% (which I gave him) and expected inflation = 6%.
Now actually Jonny boy used yr/yr PAST inflation to get his 6%, which of course is a horrible way proxying forward looking inflation, which is the issue.
Now Dr. Chinn’s post used market measures of expected inflation. Which of course will cause Jonny boy to accuse our host of being a corporate home boy or something like that.
Oh this gets fun. JohnH is now claiming market measures of expected inflation are incredibly unreliable. Like this lying troll has a superior forecasting model. Jonny boy even provides this from Ed Yardeni et al. is his stupid attempt to suggest the rest of us are fools:
https://yardeni.com/pub/expectinflat.pdf
Funny thing – I suspect Yardeni would note how his charts show market measures did pretty well until to the post pandemic boom. But little Jonny is too stupid to get that.
It’s funny you mention Yardeni, or JohnH does, because I have always thought of Yardeni as “the real deal” of how Kopits imagines himself in his own mind.
You probably have followed Yardeni more than I have. Here is his latest:
https://www.yardeniquicktakes.com/falling-interest-rates/
Interest rates continued to fall today after Jamie Dimon, who is the President, CEO & Chairman of JP Morgan Chase, warned that the banking crisis is “not yet over” and will cause “repercussions for years to come.”
Yardeni continues as he notes that the FED reign of higher interest rates is likely done. Yea Yardeni is disappointing the JohnH battle cry for high interest rates. Oh well.
I don”t see a banking crisis happening in the USA. But there’s a good argument that can be made for a main street style recession. But I am not ready to predict either happening at this moment. But pulling on demand side levers when most of the problem is supply chain and war created shortages is not useful. I don’t think Powell knows what he’s doing, and I think the Fed would be better served with a change during the start of Biden’s 2nd term.
I live in a suburban style area. I have seen more homeless on the streets in the last 3 years than I ever remember seeing in my local area. And I’m left wondering, when our economy largely follows the national economy, what does it mean when the official numbers say we have very low unemployment, economists go on TV and tell us wages are too high, and I see 3-4 times the multiple of people walking around the streets, obviously homeless, foraging dumpsters behind restaurants and grocery stores. These aren’t all misanthrope/disaffected white men. Some are young, and some are women. Most are men, but I see a wide gamut of types wandering and begging. Not just the unkempt “I’m a Vietnam vet” guys. Different types of people, while we quote high employment and “high wages” for food service help. Something isn’t adding up~~literally not adding up, and I see very few lightbulbs or “epiphany” moments from credentialed economists who seem quite happy to go on quoting agency numbers, and repeating corporate talking points as if CEOs are hanging out at the dumpsters behind the grocery stores for conversation on the way home from the “C suites”.
“I don”t see a banking crisis happening in the USA.”
i agree. but that does not mean banks are not having trouble. maybe not the big banks. but regional and smaller are going to be dealing with the impact of a very fast rate change regime for a while. they are not quite zombie banks. but they will be stuck with treasuries which lost value. and this will impact how easily they can offer loans in the present. unless the fed offers a solution that will buy back those treasuries at value. not sure that will happen. so a drag on the economy, not a crisis.
i did not mind some rate hikes. i was not in favor of the .75% hikes. too fast. now we see those consequences.
https://www.yardeniquicktakes.com/bond-yields-spiraling-down/
More from Yardeni:
What does the bond market know that the equity market doesn’t? The yield on the 10-year Treasury is down from 4.25% on October 24, 2022 to 3.29% today. The S&P 500 is up 8.0% over the same period. Bond investors must believe that the banking crisis will soon morph into a credit crunch and a recession, so inflation will continue to fall perhaps even more rapidly than widely expected.
My concern has been that high interest rates might stress the banking system. I have also suggested the inflation spike is over and the continuation of high interest rates would lead to a recession. Now JohnH has been mocking those of us who have such concerns but it seems his new guru (Yardeni) shares our concerns. Yea – Jonny boy is not up to speed on these issues. Go figure.
Yardeni says: “Bond investors must believe that the banking crisis will soon morph into a credit crunch.”
Yardeni is a smart guy, especially on oil/energy. But I’m curious how he thinks a few tech industry concentrated banks’ bad risk management qualifies as what he literally labels a “banking crisis”. WOW. Did anyone at Yardeni’s alma mater tell him that “crisis” is a very strong word that should be reserved for certain contexts?? I respect Yardeni overall, but labeling a few tech industry bank risk management screw-ups as a “crisis” strikes me as being taken out of the pages of Kopits’ 2022H1 recession manual.
It is kinda odd, on the one hand to make big claims about “real” mortgage rates and on the other to insist that market measures of inflation expectations are…whatever it was Johnny claimed. If we don’t have reliable measures of inflation expectations, then we don’t have any basis for claiming real mortgage rates, before or after tax, are “a helluva deal.” Can’t have it both ways.
Jonny boy does have his own way of measuring expected inflation. The year to year inflation rate we just observed. Yes – Jonny boy does not know adaptive expectations has proven to be a terrible means for forecasting inflation.
YrY mortgage rates are about to nominally decline in 2023.
You don’t have to speculate about real interest rates. You can today buy absolutely safe U.S. Treasury Inflation Protected Securities (TIPS) with real interest rates of 1.1% to 1.5%, guaranteed.
joseph: JohnH commented on after-tax rates on mortgages.
True. But since mortgage rates are higher than government bond rates (as another JohnH used to remind us over and over again) Joseph just nailed the big picture that this JohnH has gotten so terribly wrong.
“After-tax calculation uses maximum marginal tax rate.”
You are being quite generous in this assumption as the maximum marginal tax rate only applies to households with more than $700,000 in taxable income. And they probably own a million dollar McMansion to have deductible mortgage interest above the standard deduction.
“These calculations seem to indicate mortgage rates, even for the highest tax brackets, are now solidly in the positive region.” It’s hard to argue with data that does not link to any specific source data! I guess this is what might be called faith based economics! It’s suspicious too that it was the 15 year mortgage with its relatively low rate was the one that got cherry picked!
Would anyone care to comment on the performance of the various forecasting models over the past five years? Yardeni did this for TIPS breakeven, and the forecasting accuracy could hardly have been worse. SPF has averaged about 3% off. Cleveland nowcasts have performed better, averaging “only” about 2% off (33% of realized CPI).
So we’re supposed to use these unreal forecasts to determine real interest rates? Surely you jest.
Even if these forecasts could somehow be construed as real, the chart clearly shows that the SPF tax adjusted mortgage rate is below zero, definitely not “solidly in the positive region.” And the Cleveland Fed tax rate adjusted mortgage rate has barely been positive for most of the last decade. And using these blatantly fallible inflation forecasts today, you can eek out only a 1% real mortgage rate!?!
Everyone knows that mortgagees are being subsidized by tax breaks. On the flip side small savers are being brutalized by a decade and a half of negative or near zero real rates that are fully taxable…but it appears that economists here want to lower interest rates even further, punishing those who dare to save for a down payment on a new home, for their kids college education, or for their own retirement.
Worse yet, the punishment of small savers seems to be outside the Overton Window here…just as the privileging to wealthy holders of stocks and McMansions is also out of the Overton Window here.
JohnH: You are clearly reading-challenged, when you write:
The legend to the figure indicates I am using FRED series MORTGAGE15US. The legend cites “Philadelphia Fed Survey of Professional Forecasters, Cleveland Fed” for inflation expectations series, both of which have been used multiple times on this weblog. Did you want the hyperlinks? Finally, if you are wondering about the “after-tax” calculation, I thought this was obvious to you since you mentioned after-tax mortgage rates. However, if you don’t even understand what the appropriate calculation is, then I will tell you the nominal after tax rate is mortgagerate*(1-marginal tax rate). I note that I use the maximum marginal tax rate appropriate for the highest income bracket.
I am forced to conclude you are the second stupidest person to comment on this weblog currently.
Jonny boy seems to like Edward Yardeni even as Jonny boy has no clue what Yardeni does. Check out figure 9 from this:
https://www.yardeni.com/pub/inflexpect.pdf
It also shows this Survey of Professional Forecasters. Hmmm – I wonder if Jonny will now start attacking Yardeni.
“It’s hard to argue with data that does not link to any specific source data!”
As Dr. Chinn has already responded – he did cite his data. But Jonny boy cannot read legends.
BTW – you did not cite any data. But then Jonny boy never does.
“Would anyone care to comment on the performance of the various forecasting models over the past five years? Yardeni did this for TIPS breakeven”
He presented the data but there were no comments beyond your dishonest and stupid ones. Yes – Jonny boy now is misrepresenting Yardeni. BTW troll – his graphs cover 20 years not just 5.
15 year after tax fixed mortgage rate adjusted by 10 year SPF median expected inflation (tan square), 15 year after tax fixed mortgage rate adjusted by Cleveland Fed 15 year expected inflation (green line)
“the chart clearly shows that the SPF tax adjusted mortgage rate is below zero, definitely not “solidly in the positive region.” And the Cleveland Fed tax rate adjusted mortgage rate has barely been positive for most of the last decade.”
First of all you flip flopped the tan squares and the green line (yea Jonny cannot read). Secondly your claim was not about real rates over the last decade but about the current real rate. Look again Mr. Magoo – both have recently jumped well into positive terrority. Jonny boy is really really dumb.
Just one more on your latest fact free rant:
“Would anyone care to comment on the performance of the various forecasting models over the past five years? Yardeni did this for TIPS breakeven, and the forecasting accuracy could hardly have been worse. SPF has averaged about 3% off. Cleveland nowcasts have performed better, averaging “only” about 2% off (33% of realized CPI).”
If you look at the first three years of your “past five years”, the forecasts were pretty good. Yea there was a lot of unexpected inflation for the period from Jan. 2021 to June 2022. I suspect every forecasting model missed that. Now inflation of late has been closer to expected inflation. Yea – Jonny boy is the expert on cherry picking.
‘So we’re supposed to use these unreal forecasts to determine real interest rates? Surely you jest.’
Clearly you have not read Fisher’s 1907 classic. Repeat after me moron:
Ex ante real interest rate = Nominal interest rate minus expected inflation rate.
Yes ex post rates can be different if actual inflation differs from expected inflation. This is true by definition. But Jonny boy does not know even basic definitions. Hey Jonny – if you had a superior forecasting model then you should tell us what it is. But you don’t as you are indeed too stupid to even know what forecasting means.
JohnH: I think it is clear you cannot read a graph. For you, let me put it in the simplest terms an idiot can understand. As of February 2023, the ex ante after tax real mortgage rates measured using 10 year expected inflation (from SPF), *and* the measured using 15 year expected inflation (from Cleveland Fed) are BOTH (tan squares, green line) above zero.
Well, that’s interesting–“I am forced to conclude you are the second stupidest person to comment on this weblog currently.” OK, so let actually is one supposed the read actual data used and assumptions used from a graph that shows no numbers?
With rates changing rapidly this month, the results can change overnight, making the date of the data critical. I provided my inflation assumption and my mortgage rate assumption. None of that was provided in the above chart. And no actual data was provided.
In addition, the after tax calculation depends a lot on the tax bracket assumed. All information about the tax bracket came in the statement about “even for the highest tax brackets.”
JohnH: The highest tax bracket is 37%. All other rates are lower. Hence, any after-tax mortgage rate I cite using these alternative tax rates would be higher, thereby negating even more strongly your assertion that after tax mortgage rates are negative.
Man, you are dumb. Please think before commenting.
You expect JohnH to think? You must know him all that well.
With rates changing rapidly this month, the results can change overnight, making the date of the data critical. I provided my inflation assumption and my mortgage rate assumption. None of that was provided in the above chart. And no actual data was provided.
Seriously dude – even Mr. Magoo can read a map. And the series that are clearly labeled are easily looked up. I guess you never learned to use FRED or Google. But you provided ASSUMPTIONS divorced from the actual data. As in that stupid 6% inflation forecast. Why not just do a Bruce Hall and assume expected inflation = 13.3%!
BTW you did notice that the graph shows negative after-tax real mortgage rates in late 2012. Let me help you out here. In Nov. 2012 nominal mortgage rates were 3.3% and expected inflation was near 2.5%. Now take off your shoes so you can count past ten and tell us what the tax rate was.
But wait – I do not recall little Jonny boy back then yelling about this topic. Oh no – you were too busy bashing Obama as you did your best to give us President Romney.
‘With rates changing rapidly this month, the results can change overnight, making the date of the data critical. ‘
Seriously dude? I guess you think inflation forecasts are published hourly. Try monthly moron. Now Fannie Mae published mortgage rates weekly.
But come on little Jonny, it is April 10 at 2:50PM. What’s the mortgage rate for this minute? Not for 3PM or 2:45PM. I want an accurate reporting or this exact minute. Knock yourself out troll.
https://fred.stlouisfed.org/series/MORTGAGE30US/
30-Year Fixed Rate Mortgage Average in the United States
Check out this data since Nov. 17, 2022. This weekly reported rate has varied between 6.1% and 6.7% over this period. For Jonny boy’s claim to be even remotely true, it would have to be 4% or less.
Now I admit this rate varies and weekly reporting is not the same as reporting each and every second of the day which I guess Jonny boy expects Fannie Mae to do. But come on man – there is no way anyone got a 30 year mortgage for nominal rates less than 4% in the last half year. But this is the kind of utter nonsense Jonny boy is now peddling.
Of course this flip flopping clown was complaining about mortgage rates above 7% last fall. Yea he now denies that but that is what Jonny do – lies and lies and lies.
“one supposed the read actual data used and assumptions used from a graph that shows no numbers?
This from Jonny boy who found someone reporting on the volatility of mortgage rate spreads over time where Jonny boy thought the graph was showing how high the LEVEL of mortgage rate spreads had become.
No Jonny boy cannot read his own graphs but then little Jonny boy does not even know what the concepts even are.
We have recommended that Jonny boy take a Money and Banking class from his local community college but something tells me that Jonny boy has been banned from campus.
https://fred.stlouisfed.org/series/PRFIC1
Real Private Residential Fixed Investment (2012$)
Over $732 billion as of 2021QI
Less than $577 billion as of 2022Q4!
Jonny boy assured us that higher real interest rates would have no impact on investment demand. Yea – right!
While on the topic of borrowing rates, one channel transmitting Fed monetary policy is bank lending. The Fed’s Senior Lending Officer Survey’s gives us a way of tracking that channel:
https://fred.stlouisfed.org/graph/?g=12kZH
Fed tightening is working to limit lending.
The next edition of the Survey is due in the first week of May. We have a preview of that survey from the Dallas Fed. Here’s the summary from the Dallas Fed’s March Banking Conditions Survey:
“Loan demand declined for the fifth period in a row as bankers in the March survey reported worsening business activity. Loan volumes fell, driven largely by a sharp contraction in consumer loans. Loan nonperformance increased slightly overall, with the only notable rise over the past six weeks coming from consumer lending. Credit standards and terms continued to tighten sharply, and marked rises in loan pricing were also noted over the reporting period. Banking outlooks continued to deteriorate, with contacts expecting a contraction in loan demand and business activity and an increase in nonperforming loans over the next six months. Some contacts cited waning consumer confidence from recent financial instability as a concern.”
https://www.dallasfed.org/research/surveys/bcs/2023/bcs2302
As can been seen in the frst picture, tightening lending is generally associated with recession.
Interesting though not surprising to those who actually know Money and Banking. Now had JohnH read that 2016 paper by Stiglitz he so totally misrepresented, he might have not that Stiglitz talked about how small enterprises had to borrow from banks at positive interest rates even when large corporations got to borrow in the Euro bond market at very very low interest rates. Yea – Stiglitz questioned whether further lowering Euro bond market rates during a depressed economy would significantly raise investment back then.
We tried to note two simple things to Jonny boy: (1) the current US market is not depressed and higher rates could still lower investment; and (2) this Stiglitz argument about small enterprises borrowing from banks would mean Jonny boy’s zest for higher interest rates would hamper investment demand by the little guys.
Thanks for a more recent research paper confirming (2). BTW if Jonny boy were honest (cough, cough) he might note Stiglitz is opposed to the FED’s tight monetary policy.
Different topic but could someone fact check this from Little Lying Lindsey?
https://www.msn.com/en-us/news/politics/lindsey-graham-claims-women-kill-babies-up-to-the-moment-of-birth-in-rant-against-abortion-rights/ar-AA19EuPY?ocid=msedgdhp&pc=U531&cvid=71c6684edd42408698b51715b2941e02&ei=12
“Well, I’m very pro-life, and I think being pro-life is a winning message. I oppose late-term abortions,” Graham said, shifting the topic. “I have a bill to set a national minimum standard of 15 weeks. 50 of the 53 European nations ban abortion at 15 weeks.
OK I get pregnacies are 40 weeks so childless little Lindsey is just wrong about an abortion at week 16 being allegedly late term. But only 3 nations in Europe are sane? Come on Lindsey – I think you lied there.
It seems CNS and Faux News are repeating Little Lindsey’s lies regarding abortion bans in Europe but this story points closer to the real deal for a lot of European nations.
https://www.newsweek.com/fact-check-it-harder-get-abortion-europe-america-1705305
How do you know Lindsey is lying? His lips are moving.
The “after tax” is based on the presumption that people actually can deduct their interests and get a number high enough to abandon the standard deduction. Even if you do get a higher deduction by itemizing, the gain is only the difference between standard deduction and itemized deduction. So for a lot of people the mortgage deduction gives minimal or no advantage.
It should also be noted that the “helluva deal” comes with a risk. Unless the value of the house continue to increase at (or above) inflation levels it doesn’t look like such a great deal. The people who purchased houses in the last few years before the 2008 crash can testify to that.
Ivan: Yes, I calculated the rate giving the biggest chance of getting a negative after tax rate.
Exactly – so even those who were set to get the most out of the tax breaks didn’t get a good deal.
Now I know we are being hard on JohnH because he deserves but to be fair – AEI’s Edward Pinto did write this BS back on April 28, 2022:
https://www.aei.org/research-products/one-pager/mortgage-rates-just-turned-negative-when-adjusted-for-inflation-and-that-could-keep-powering-the-housing-market-boom/
Mortgage Rates Just Turned ‘negative’ When Adjusted for Inflation—and That Could Keep Powering the Housing Market Boom
Now at the time of this discussion, the 30-year mortgage rate was only 5.1%. And of course these AEI clowns took the past inflation rate at the time to be the proper measure of expected inflation in the future. Yea only someone as dumb as an AEI clown (or JohnH) would forecast inflation by looking at what happened in the period from March 2021 to March 2022.
Jonny boy is accusing Dr. Chinn of cherry picking data by using this series instead of the 30-year rate:
https://fred.stlouisfed.org/series/MORTGAGE15US
15-Year Fixed Rate Mortgage Average in the United States
Let’s see – this rate is 5.64%. As Jonny boy already noted the 30 year rate is 6.3%. So let me get this straight. If 5.64%(1 – tax rate) minus expected inflation is positive then how does little Jonny boy thinks 6.3%(1 – tax rate) minus expected inflation can be positive?
Seriously Jonny boy’s preK teacher is trying but little Jonny boy does not even listen to her either.
i have made this point in the past. johnh is simply not a fan of free markets or capitalism. he believes in socialism and communism. it is fascinating that he believes the economic models in russia or china produce superior results. who really believes the average person in the usa is worse off than the average person in either russia or china? that is what johnh basically argues on this blog daily.