New COVID Stimulus Package Will Increase Interest Rates

Certified Mortgage Advisor
NMLS 1701021
January 7, 2021

Greenlight for COVID relief package

The Senate just passed a budget resolution, which we'll Greenlight the new $1.9 trillion COVID relief package. All right. So this was a tie until Vice President Kamala Harris came in. So the tie ended at 51 to 50 to pass this relief bill. Now this relief bill is actually going to increase interest rates and I'll explain here why.

COVID Relief

So first, what ends up happening is COVID relief. As COVID relief increases, what ends up happening is the government has to get that money from somewhere. Contrary to popular belief is the government isn't printing money.

Treasury Issued

What they're doing is they're actually issuing treasury, so they're borrowing money instead of printing it. So when more treasuries get issued, what ends up happening is the price of the treasury lowers.

Treasury Yield Increases

When the price of the treasury lowers the treasury yield increases and the treasury yield is closely correlated to mortgage interest rates. So as Treasury yield increases, mortgage rates increase.

Interest rates

So that's what ends up happening in the interest rates. What ends up happening as the price starts to drop on the treasury. Since everything is a little bit more diluted because 1.9 trillion needs to come out of somewhere and that increases treasury yield rates, which increases mortgage rates in the purchasing power.

Purchase Power

That impact now has a lower, purchase power for people. Because interest rates increase your monthly payment would increase for a similarly priced home, which means you can purchase a little bit less.

So how much interest rates are going to change?

Probably not a crazy amount, but we are going to see a small uptick in interest rates because of the stimulus package. Also maybe a slight decrease in buyer demand because as interest rates go up a little bit, we tend to see buyer demand dropdown. How much are we going to see interest rates change? It's incredibly difficult to predict because this relies on a lot of different factors and we're also still seeing stocks rallying day after day after day. So right now we're in really high euphoria with stocks. Odds are, we're going to see a correction at some point in the future.

Relief on the mortgage interest

When that ends up happening, we'll probably get some more relief on the mortgage interest rate side. So what I would expect interest rates would probably increase just a little bit. It's nothing that I would worry too much about. I don't think it should push you into a decision if you're not ready for it. Just because we might see a small increase. I imagine we're still going to stay extremely low, historically low over the next two years.

So even if we do see a little bit of an uptick in rates, what should end up happening is once the stock market corrects, hopefully at some point in the future, interest rates are going to benefit and decline when that ends up happening.

What experts predict

Then just to talk to appreciation a little bit, experts are predicting 6% appreciation in 2021. So that's still incredibly strong appreciation. So even if we're seeing an increase in interest rates purchasing could be a good decision monetarily, from a price perspective, as those homes continue to appreciate value. A $300,000 home at 6% appreciation. Is going to net $18,000 in pure gain just from appreciation alone.

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