2021 Recap


Interest Rates

Forecast: Expected rates to rise beginning of year and recover into the fall

Actual: Rates did rise sharply through March, as anticipated.  But recovered a bit earlier than we expected, gaining back most losses by late summer


Forecast: Strong demand and tight supply would push home prices up by high single‐digit percentage

Actual: There was strong demand and tight supply, but Covid caused supply chain disruptions and labor shortages, which pushed real estate values even higher than our robust forecast


2022 Dynamics

The Fed will play a major role in 2022

  • Tapering, rate hikes, balance sheet runoff
  • Can impact equity markets, drive interest rates, impact housing, as well as jobs

Some Fed voting members rotate each year

  • 2022 composition will be less accommodative than 2021
  • Fighting inflation is main focus – negative stock market reaction could cause Fed to lose resolve

Fed should have hiked sooner – mistakenly thought inflation was “transitory”

History can help us forecast how the Fed’s actions in 2022 will influence the markets

History – Arthur Burns

1970s – Burns was Fed Chair

  • Ignored inflation, which was rising rapidly
  • Insisted inflation would be “transitory” ‐ sound familiar?

Year over year inflation ballooned from 7% in 1978 to 14% by time he left in 1980

Burns remained steadfast that inflation was “transient”

Higher inflation caused mortgage rates to rise from 12% to 18%



Paul Volcker Fights Inflation

Hiked Federal Funds Rate from 11% to 20% in two years Inflation dropped from 14% to below 5%

Because inflation dropped, mortgage rates sharply declined from 18% towards 12%

But there were consequences –

  • The S&P 500 sharply declined by 30% during this time
  • Tighter monetary policy pushed US into recession in 1982


Alan Greenspan

  • Late 1990s – Inflation doubled from 1.75% to 3.5%
  • Higher inflation caused mortgage rates to rise from 7% to 8.5%
  • Unlike Burns, Greenspan took action mid 1999 and hiked Federal Funds Rate by 1.75% (matching rise in inflation) from 4.75% to 6.5% in a year
  • Inflation responded and dropped from 3.5% towards 1%
  • Mortgage rates dropped from 8.5% to 5.5%, sparking huge refi boom
  • But there were consequences –
  • S&P 500 fell by 50% from spring to fall of 2000
  • US entered a recession in 2001


Today Under Jerome Powell

  • 2021 inflation increased from 1.75% to 7%, Powell thought “transitory”
  • Fed is currently tapering their purchases of Mortgage Bonds and Treasuries – will not hike and reduce purchases at same time
  • Done tapering in March, likely to begin hiking in May
  • Fed targeting three rate hikes in 2022 and two or three more in 2023
  • Inflation and interest rates can still rise until Fed acts
  • If Fed can tame inflation, mortgage rates should drop, but may be from higher levels




Covid plays major influence on monetary policy and supply chains

  • Major surprise in Covid could change outlook dramatically

Additional stimulus may fan flames of inflation

  • Would push Stock prices temporarily higher
  • Cause mortgage rates to rise further
  • Make Fed’s job of corralling inflation more difficult

Runoff of Fed’s Balance Sheet

  • First step – Fed to stop purchasing new Mortgage Bonds and Treasuries
  • Next step – Hiking Fed Funds Rate
  • Fed still buying $70B/month in Mortgage Bonds through reinvestments, keeping rates low
  • If/when Fed stops reinvestments, mortgage rates could move higher than previously thought

Stock Market Forecast

Stocks are expensive and price to earnings multiples are high


Rate hikes could cause P/E multiple contraction, resulting in lower stock prices, as seen in the past


Forecast: ~10% decline in the major indices in 2022


Interest Rate Forecast

We anticipate mortgage rates to rise along with inflation during first part of the year towards 3.75%

With Fed action, softer stock market, and slowing economic conditions, interest rates should head lower in second part of year towards 3%

Forecast – Rates rise towards 3.75% first half of year, decline towards 3% second half as Fed hikes rates

Strategically, this sets up for a bias of less upfront fees because of a refinance opportunity ahead

Housing Forecast

Housing will remain strong in 2022, but not as strong as 2021

Demand may be slightly softer due to a rise in interest rates, but still robust

Supply will increase, but remain tight

  • Tight labor, supply chain disruptions, and semiconductor shortages will all play a role

Rents will continue to rise

  • Increases will remain above 5%, pushing many people to see the benefit in buying
Forecast – Mid to high single‐digit appreciation, still providing a great wealth creation opportunity