Analysis from First American Financial Corporation says global uncertainty—such as the conflict between the U.S. and Iran—impacts not only geopolitical relations but also the U.S. housing market.
“When global investors sense increased uncertainty, there is a 'flight to safety' in U.S. Treasury bonds, which causes their price to go up, and their yield to go down—U.S. homebuyers benefit from this dynamic,” said Mark Fleming, Chief Economist at First American.
Fleming said the 30-year fixed-rate mortgage follows the 10-year Treasury bond. Since the end of the recession, the 30-year fixed-rate mortgage remained 1.7 percentage points higher than the 10-year Treasury yield.
He added that if this trend continues, and the 10-year Treasury yield dips to 1.5% due to uncertainty and a global “flight to safety,” then the 30-year fixed-rate mortgage could fall as low as 3.2%.
“The 30-year, fixed-rate mortgage fell to its lowest level in a month in response to the decline in the 10-year treasury yield on the morning after the U.S. airstrike in Iran,” Fleming said.
First American reported that the second-largest shift in the 30-year fixed-rate mortgage since the end of the Great Recession occurred following the 2016 Presidential election.
Mortgage rates increased to 3.94% from 3.57% the week after the election. A few months earlier, the U.S. Treasury bond yield declined by 0.29 percentage points and mortgage rates fell 0.29 percentage points in the weeks that followed the “Brexit” vote in June 2016.
“More recently, the decline in mortgage rates since the beginning of 2019 has been partly due to uncertainty around the outcome of U.S.-China trade relations, including the largest single-week decline in the mortgage rate (0.22 percentage points) since the end of the Great Recession in March 2019,” Fleming said.
First American’s Real House Price Index from October 2018 found that the 10-year Treasury yield was 1.7% and the 30-year fixed-rate mortgage was 3.7%.
With an average national household income of nearly $66,400, consumer house-buying power, the combination of one’s income, and the prevailing mortgage rate was $418,000.
Fleming said that even a small change in the 10-year Treasury yield—even a small drop of 1.6%—would bring a mortgage rate of 3.3%.
“Assuming no change in household income, that would mean a house-buying power gain of $21,000, a five percent increase. Amid uncertainty, the house-buying power of U.S. consumers can benefit significantly,” he said.