After consulting with a few of our trusted friends in the banking industry and mixing in some thoughts of our own, we weigh in on 2019 mortgage interest rates.
Mortgage rates impact occupancy cost for owner-users and cash flow for investors. So, it is important to keep an eye on the key factors that influence the flow and cost of mortgage capital.
First off, higher regulatory costs have the major banks looking for bigger customers to create the scale needed to increase profitability, which is making it more difficult for small businesses to access capital. Going forward, small business owners will have to depend more on community banks for capital and those banks tend to charge more for money because they have a different appetite for risk and lack the scale of their larger counterparts. So, there’s one factor that will put upward pressure on rates.
Present economic conditions favor lending for shorter rather than longer periods because the yield curve has flattened, meaning there is little difference between short and long term US Treasury yields. That is making banks, especially the big players, more shy about funding some commercial mortgages because they can take a shorter and safer route to the same profit. If that results in a reduction in the supply of mortgage capital in 2019 without a corresponding drop in demand, rates could drift higher.
The flattening of the yield curve is, in part, due to the current monetary policy of our central bank. The Fed hiked its Fed Funds Rate four times in 2018, and short term treasury yields rose sharply as a result. Longer maturing bond yields (10 years or more) reflect investor outlook for long term economic growth and inflation. That outlook has become more pessimistic because economies around the world have slowed markedly in the past year.
In response, cautious investors have moved to purchase longer US bonds for safety’s sake, which drives their cost up and their yield down. The yield decline at the long end of the curve is good for commercial mortgage borrowers because mortgage rates are generally tied to a spread over the yield on the 10 Year US Treasury issue.
So, we now have upward pressure at the short end of the yield curve and downward pressure on the long end. This movement has brought us just 15 basis points away from a yield curve inversion (when the 2 year yield is higher than its 10 year counterpart). An inverted yield curve has occurred before each of the last 7 US economic recessions, a fact not lost on investors big and small.
However, when it comes to commercial mortgage rates, the current state of the yield curve bodes well for borrowers.
Barring a black swan economic event that tightens the supply of mortgage capital, we think 2019 should be another year of affordable mortgage rates. In fact, we have already seen SBA 504 loan rates dip back below 5% after rising to almost 5.5% last year. Residential mortgage rates have also fallen back under 4.5% after climbing to 5% late last year. If that props up sluggish home sales, it will lift consumer and business sentiment, both good things for the US Economy.
It is important to note that mortgage rates are still near historic lows. Many of us remember the day when a 30 year mortgage carried an interest rate of 15% or even more. Let’s all hope we never go there again.