It’s All About the Treasurys

January 15, 2022

If you have been following my commentaries, you know I have been concerned about consistent double-digit price appreciation.  Long term, it is not healthy.  Homes selling within days, multiple bids, over list price – it is simply too hot. It is tough on everybody. It would be a good thing if some steam was released from the pressure cooker.

This does not mean, at all, that we are looking down the abyss of a bubble.  We are not.  Bubbles are created when homes sell due to fear, i.e., the fear of buyers that prices are going up, and therefore, “I need to buy now!”.

Demand is far outpacing supply. Millennials, Generation X, and Baby Boomers desire to move to the Gulf Coast, accelerated by persistently low interest rates, and a COVID life inducing shift to move to smaller metro areas like Sarasota County.  Accordingly, prices have nowhere to go but up.  What we need is for the pace of appreciation to slow down, because continued 25% annual appreciation is too hot, not sustainable.

For over 8 months, general inflation (I will address that next month) and overly heated prices have been my #1 concern. As I have consistently opined in The Rob Report: “Do not listen to the media pundits when they, ‘Oh my, rates are going up, not good for real estate!’”. Sorry.  I’ve been saying when that happens, that will be a good thing. It is the only thing that can cool, not stop, the hyper-rate of appreciation. It will also extend days on the market, which will bring some assemblance of a moderately more normal housing market.

Mortgage rates typically track the 10-yield at an approximate 2X factor.  Further, given economies of scale from a globalized economy, mortgage rates have been on a downward trajectory for the past 40 years.

I have been hoping to see the yield on the 10-year Treasury go to 1.75%, hopefully tempt the 2% mark. If so, mortgage rates would rise to 3.75% – 4% range. In 2021, the yield stubbornly stalled in the 1.4% to 1.5% range, mortgage rates high 2.75% to 3.15% range. Only once, in March 2021 did it go to 1.74%, but never broke out beyond that, quickly went back down with mortgage rates following.

Well, this past week, with “transitory inflation” in the rear- view mirror, and currently the highest inflation in 39 years, the yield on the 10-year Treasury is testing the 1.74% threshold.  Sure enough, the pundits are saying in the media, mortgage rates are going up, as if it is negative omen.  It is not.  It is a good thing for sustainable real estate values.

For Econ Foodies like me, the next few months will be an exciting time to track the 10-year Treasury. It is going to be a bit of a slow plod, but it will move north.  I think the 10-year yield is going to have a difficult time breaking through 1.85%, notwithstanding the current historic inflationary cycle. Although, it has already pushed the Freddie Mac 30-year mortgage rate up to almost 3.5%.  All good news, as it is the only thing that will cool the rate of appreciation.

So, here’s my prediction, hot off “The Rob Report”. In 2021, national home appreciation rate was 13%. Most economists project 7% range for 2022. In Sarasota we saw an approximate 25% appreciation rate, due as set forth above to demographics, shifting work patterns to smaller metro areas like ours, increased in-bound family moves to Sarasota, and the traditional impact of our northern feeder markets further swelled by reaction to COVID and lockdowns. Accordingly, drumbeat please … 2022 Sarasota homes will appreciate at an 11% range, days on market, currently 3 weeks, will grow to 5 weeks.