What Could Drive Mortgage Rates in 2021?

I’ve seen a number of articles lately predicting that mortgage rates will rise in 2021, a couple even from other HousingWire contributors. The rationale for these predictions have been erudite, multifactorial and complex. I am, on the other hand, a simple man. Most days I don’t even wear shoes. When I think about the direction of mortgage rates there is only one factor I consider – and that is economic growth. 

Over the years I have professed that the rate of economic growth pretty much explains the whole lasagna so that should be the entire focus. When the economy gets better, bond yields rise and mortgage rates follow. When the economy slows, bond yields drop and mortgage rates follow. I expect mortgage rates in 2021 to stick to the same pattern. 

The trick is to find a respectable range within each economic cycle. I started to incorporate bond yield forecasts for my yearly prediction articles and every year since 2015 I had said the same range. The 10-year yield would range between 1.60%-3%. In 2020, that range broke but continued a long-term downtrend in yields which started in 1981.

Before the 10-year yield broke below 1% this year, I wrote this year that if the U.S. went into a recession the 10-year would trade between -0.21% – 0.62%. On the morning of March 9, the 10-year traded at 0.34%. Since that low point the 10-year yield has been above 0.62% for most of the time during the COVID recession. This has been a consistent strong indicator for me, that, despite all the drama in various sectors, the bond market expected the economy to improve.




When the COVID recession hit the U.S., I proposed an economic model to track the progress of the economy. I called this model the AB Model for America is Back. The last variable that needs to be realized for this model to predict that the American economy is growing again is for the 10-year yield to break over 1% and stay in the range of 1.33% to 1.60%

Time is running out for this last variable to be checked off in 2020, but it remains within the realm of possibility. Here are the factors that can either drive yields to break above 1% this year or prevent this from happening.  

1. COVID infection rates

Presently, the number of COVID-19 cases in the U.S. is rising again. If this trend continues, as I expect it will as we go into the winter months, we will reach new daily highs in the number of cases. The risk to the economy is that if new cases lead to such high levels of hospitalization rates, the government will be forced with much harder restriction nationally to combat the spread of the virus. Without that, the risk to the economy isn’t as great as some might think now. 

Our country has learned how to continue to consume goods and services even with a virus that is infecting and killing Americans every day, the ups and downs of infection rates haven’t impacted the bond market or economic data too much recently. 

Take the recent retail sales data as a case in point. Following the drastic dip at the beginning of the crisis, retail sales have now gone above the pre-COVID numbers. We need to credit the disaster relief package for some of these gains. Secondly, the fear of COVID-19 has faded away from American behavior, which means we went from hoarding toilet paper to buying homes, cars, driving more and purchasing more stuff on-line.

Posted on housingwire.com on 10/19/2020.