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Over the next decade, billions of dollars of mortgage interest will rest on one question: Will AI lead to higher or lower mortgage rates?
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In the near term, the answer is slightly clearer: the trillions being spent on AI are inflationary, and inflation is the enemy of low rates.
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But things could change quickly. Tech titan Bill Gates made that point this week in a new essay he wrote about AI:
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“My message to leaders is: You have a chance to act now, before unemployment rises sharply…”
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For mortgagors, higher unemployment matters for multiple reasons, including that it usually leads to lower interest rates.
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Since inflation targeting began in February 1991, nearly 90 per cent of rising-unemployment periods coincided with lower five-year fixed mortgage rates.
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In those stretches, the median drop in five-year fixed rates was 84 basis points, according to data from MortgageLogic.news (MLN), a mortgage news and data site edited by yours truly.
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(Methodology note: This analysis measured the change in leading five-year fixed rates versus unemployment over the same 12-month spans.)
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Now hold that thought, in light of what these AI pioneers are forecasting:
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- In an interview with The Economist, Elon Musk predicted that “AI will be able to do any job better than any person can do that job.” (One could carve out therapists, elected officials, clergy, judges, social workers, and other human-centric roles, but you get his point.)
- Unlike past technology cycles, Anthropic chief executive Dario Amodei says it’s possible that AI “permanently drives down the demand for labour.”
- Gates agrees, arguing “this time really is different” versus the microprocessor, the PC, and the internet, which were net job creators. His reasoning: AI is the first thing that will exceed human cognition across the board, rather than in a single area.
- With robots doing physical work, there will be fewer places for displaced workers to go, Gates predicts, with Amodei adding that AI will also be “good at the new jobs that would ordinarily be created in response to the old ones being automated.”
- And it’s not just computer and call-centre jobs at risk. Gates says, “‘Smart’ robots will begin to compete with people on some physical tasks — in the construction and hospitality industries, for example — by the end of the decade.”
- One thing keeping AI from taking more jobs today is reliability. But that problem will be mostly solved in the “next few years,” Gates told The Atlantic. After that, good jobs thin out, with Gates flagging “entry- and mid-level” roles as the most exposed.
- “This will be very bad for the job market,” he told Axios, saying he’d stake his reputation on this prediction.
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Others reject the net-job-loss premise entirely, including Meta chief executive Mark Zuckerberg and Nvidia chief Jensen Huang.
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But either way, it’s harder to find credible predictions that AI will create a lasting job boom after its buildout phase.
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Why this matters
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The mortgage relevance hinges on inflation, a crucial driver of interest rates.
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Some of the most prominent AI leaders believe the technology will result in structurally higher unemployment, leading to weaker wage growth, weaker consumption, and lower inflation — eventually.
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Mind you, government transfers, including potentially universal basic incomes, could offset some of that income loss.
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But unemployment isn’t the only way AI trims inflation.
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AI will also massively increase the output of goods, says Musk, and at better prices.
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“I’ll make a prediction, which is that deflation will be the issue, not inflation,” Musk said. “If the output of goods and services increases faster than the money supply, you will have deflation.”
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What’s more, “After one company adopts (Robots and AI) and uses the savings to lower its prices, its competitors will feel immense pressure to do the same,” Gates says.
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