Rate Increases Pause as Fed Lowers Growth Outlook

Slowing economic growth has set the stage for a pause in farm mortgage rate increases.

The Federal Reserve left interest rates unchanged at its March 20th meeting and signaled it doesn't expect to raise them again this year. That's an abrupt halt to what had been a steady march of rate increases, which pushed up borrowing costs on both fixed and variable rate farm real estate loans last year.

The average rate for a long term fixed-rate mortgage rose to 6.1% at the close of December 2018, up 50 basis points from 5.6% for the same period a year ago, according to regional federal reserve banks. Regionally, fixed rates ranged from a high of 6.6% in the Dallas fed district to a low of 5.6% in the Chicago region.

Banks charged an average 6.0% on variable-rate farm mortgage loans at year-end 2018, an 80 basis-point increase from 5.2% a year ago. Regional variable rates ranged from a high of 6.3% in the Dallas region to a low of 5.7% in the Minneapolis fed district. No data was available from Farm Credit banks lending across the Heartland.

Looking ahead, Fed officials now expect a single rate increase in 2020 and none in 2021. That is a sharp turnabout from December when the Fed said it expected at least two more 0.25% increases this year and another in 2021. The widely followed Livingston Survey, which summarizes forecasts of 39 economists from industry, government, banking and academia, also predicted in December that the interest rate on 10-year Treasury bonds would rise to 3.42% at the end of June 2019, edge up to 3.51% at the end of December 2019, and reach 3.55% at the end of December 2020.

Source: Farmland Investor Letter analysis of Federal Reserve data; Board of Governors of the Federal Reserve System (US), 10-Year Treasury Constant Maturity Rate [GS10], retrieved from FRED, Federal Reserve Bank of St. Louis.

The yield on the 10-year Treasury note (a bellwether for mortgage rates) fell to 2.53% after the Fed released its statement on interest rates on March 20. That's down from 3.03% from the start this year.

The downbeat economic assessment is based on slowing growth in household spending and business fixed investment. The Fed forecasts that these factors will ease economic growth to 2.1% for 2019, down from the 2.3% it forecast in December.

The pause in interest rate increases will help support the farm real estate market, which is under pressure amid the downcycle in crop prices and the Trump trade war with China. Rising borrowing costs reduce both the number of qualified potential buyers of farmland and the price they can afford to pay for land. In addition, higher rates signal returns on alternative investments to farmland are rising, making farmland less attractive.

Source: Farmland Investor Letter analysis of Federal Reserve data. St. Louis region includes southern Ill., southern Ind., western Ky., western Tenn., northern Miss., Ark., and eastern Mo. Data collection for St. Louis region commenced 2Q12. NA= Not available

Source: Farmland Investor Letter analysis of Federal Reserve and AgriBank data. *Heartland region includes Ark., Ill., Ind., Iowa, Ky., Mich., Minn., Mo., Neb., N.D., Ohio, S.D., Tenn., Wis., and Wyo. Because the Federal Reserve Bank of Chicago doesn't collect variable rate data on farmland loans, we use the quarterly average variable rate charged by AgriBank-funded Farm Credit Services associations as a proxy for the region. St. Louis region includes southern Ill., southern Ind., western Ky., western Tenn., northern Miss., Ark., and eastern Mo. Figures in italic represent data from fewer than 10 lenders and may be less indicative of regional trends. Data collection for St. Louis region commenced 2Q12.

Midwest farm real estate borrowers have historicaly enjoyed lower mortgage interest costs over borrowers in the western U.S. The spread for fixed-rate mortgages between the Chicago and San Francisco Fed Districts has averaged 69 basis points since the first quarter of 2003. The lower interest rate advantage for Midwest borrowers eased 19 basis points to 23 in the first quarter of 2022.  (1 basis point = 1/100th of a percentage point.)