Bear Flattener| 5 Ways it Impacts Mortgage Rates & Home Prices

Bear Flattener and the Yield Curve

Clearly, “the curve” is flattening. This has many possible implications for mortgage rates, home prices, stock markets, and retirement accounts.

I’ve been watching the curve flatten for the past month and decided (while having lunch in Dallas today) to write a concise article about it now that it’s evolving into a possible trend.

This is as short as I could write on such a complicated subject.
Writing this to let you know that “the next thing” could be starting.

Private Alerts

Some of you receive private “alerts” from me from time to time. I used to call those “red alerts” many years ago when I posted them online, but due to potential regulatory-type issues, I no longer post those online.

If so, you’ll already know that the recent solid breach of 4.25% on the 10-year US Treasury Bond was an event I had been predicting/warning about for almost 2yrs.

Now that it’s happened, you’re seeing the curve flatten (short-term yields are starting to rise above long-term yields)…EXACTLY as predicted.

I’m excited because it has both home price and mortgage rate implications.

What Does the Bear Flattener Mean for Home Prices?

Will home prices rise?

Will home prices drop?

What Does the Bear Flattener Mean for Mortgage Rates?

Will mortgage rates rise?

Will mortgage rates drop?

I’m Not Telling

Not to be coy, but I’ll only address those questions privately because the answers are “yes” and “no.”

For this article, “it depends.”

Meanwhile, It’s wise to avoid assuming that home prices will automatically rise (except for a short-term blip) when rates drop.

Affordability and supply are where to look next for those answers.

It’s not uncommon (historically) for both prices and rates to drop at the same time.

However, it’s also unusual (understatement of the year) for home prices and mortgage rates to rise together as they have, so anything’s possible.

Cashout Refinance, Does it Make Sense?

A cashout refinance (at current rates) could be worth considering if you want to recapture equity in a tax-advantaged way AND have a purpose for the funds that offset current high mortgage rates.

It depends on your plans for the funds and your view of what this could mean for you (if margins start to decline between mortgage bonds and USTs…margins dropping implies lower mortgage rates, EVEN IF the Fed doesn’t lower rates).

Limiting this discussion to the fact that there are all sorts of possible implications if the bear flattener continues for a few months that you need to know about for your financial goals.

Anyone over 50 years old will know what I’m talking about.

MEANWHILE, here’s “Bear Flattener 101” to simply present it as a topic you might want to pay serious attention to:

What is the Bear Flattener?

The bear flattener is when long-term interest rates fall while short-term rates rise. This causes the yield curve to flatten out.

Why does it matter?

When the yield curve flattens, it can signal slower economic growth ahead. Flattening yield curves (following rising inverted curves) have preceded past recessions. Lag times can be 3-6 months before this is apparent to the markets.

How could it impact mortgages?

If the flattening continues, mortgage rates may also decline. This could make buying a home or refinancing more affordable.

Are home prices affected, too?

Possibly. Slower growth tends to cool down hot housing markets. Prices may rise more moderately if the economy slows. Prices may drop if wages don’t keep pace with inflation (and many other factors). Meanwhile, short supplies are still hamstringing potential buyers.

I expect that metric to change.

This is another topic that I might write about soon. Have avoided it until supply data confirms that trend change (starting already in the higher price ranges (above $1 million) but not yet in the lower to moderate price ranges).

Texas-Florida-Colorado

I’m watching two specific (and almost always reliable) data points to be ahead of the curve on that topic, and they haven’t confirmed a meaningful supply trend change yet in Texas, Florida, or Colorado (except in Austin, though Austin prices haven’t yet confirmed if this will last or not).

And Denver has my attention at the moment. Both markets greatly increased builder supply over the past few years, with more homes built than demand.

At the moment (subject to change), my view is the over-supply issues in Austin and Denver aren’t due to lack of demand per se but builder exuberance…Builders went nuts building too many homes (and over-priced homes) in the Austin and Denver markets. Aggressive builder “incentives” are being offered to wind down inventory.

Housing Data for Houston and Dallas shows strength. Orlando and Tampa Bay are doing exceptionally well during this period of high rates. Florida condos require extreme due diligence due to the new condominium rules beginning in 2025.

Colorado resort areas and smaller mountain towns are very strong. Be aware that there’s a “short-term rental backlash” in many Colorado mountain and resort towns brewing. Permit restrictions, taxes, and fees are being rolled out in many areas to diminish the supply of short-term rentals due to a housing shortage for “locals.”

When will we know if the Bear Flattener is a real trend? Or just a fake-out?‘

No one knows for sure. But yield curve moves indicate where rates and the economy may head next. Stay tuned!