The Fed
As speculated the Federal Funds Rate hiked another 75 basis points (bps) not the feared 100 bps that would have thrown a stronger shock into an already unsteady market. Analysts are projecting another 50 bps in late September pending the status of inflationary markers as we exit the third quarter.
Interest Rates Trending Down
Mortgage rates are forward looking hence the announcement last week was already built into current rates and the secondary markets as they braced for a hike as high as 100 bps. With a 75 bps hike, rates have been trending down since late last week and are likely to stabilize as we move through the next 30 days.
If inflation continues trending well above the Fed’s 2% target, anticipate further tightening and another bump up in rates as we exit the third quarter. The next hope of a significant rate drop would be a shift in monetary policy as inflation calms or action to quell a recession.
Home Prices
Forecasts from Fannie Mae’s Economic and Strategic Research Group (ESR) project home appreciation in 2022 at 16% year over year. Freddie Mac takes a more modest swing projecting a 12.8% year over year growth rate. Geographic variations will have some markets higher as others begin to experience mild pricing corrections paired with an increase in days on the market. Overall, the message is moderation in home price appreciation, an end to bidding wars and optimism among buyers that affordability and supply are making a comeback.
Market Correction or Crash
A correction is underway as market forces are back at work. The Federal Government is no longer purchasing Mortgage Backed Securities artificially keeping rates low and surplus stimulus is no longer pumping into the hands of millions of Americans at the 2020 and 2021 levels.
What we are not seeing is excess supply or large default rates on existing mortgages. Both were components of our previous market crash. A steady decline in mortgage defaults dropping from a peak of 11.36% in 2010 to just over 2% in 2022 combined with a balanced 8 month supply of new homes offers confidence our housing market is alive and well, no crash in sight.
Housing Market Confidence
Tripping up both builder and consumer confidence are the legacy Covid impacts driving a housing conundrum. First-time buyers are feeling priced out of the market following 16 straight months of double digit growth, while many home owners are hesitant to move and lose their epic low interest rate. The affordability stalemate has slowed the housing market and will allow room for modest corrections especially across markets that experienced exponential price growth and bidding wars.
Supply side challenges are keeping new home prices elevated and giving many builders pause with a looming recession. New home starts are a key economic indicator of growth in our country and the trepidation on this front could help curb inflation faster, pull that recession into Q1 of 2023 and get us back up and moving in a balanced market as we exist 2023. That said, the many variables including an ongoing war will continue to make exact estimates and timing the market impossible.
Timing the Market
The economist team at Moody’s Analytics concluded their Weekly Market Outlook on July 14 with this summary: “pegging the precise peak in inflation has proven a fool’s errand that depends on the timing of major exogenous shocks such as a stubborn pandemic and Russia’s invasion of Ukraine.
Creating Affordability
Financial tools including rate buydowns and adjustable rate mortgages (ARMs) create affordability in the short-term and focus on the upside ongoing appreciation of owning real estate. For additional details and an example of how the numbers work, see my recap of Financing solutions in a market of rising home prices and interest rates from July.
For sellers offering a buydown over a price reduction will:
- lower the cost of buyer financing versus your home
- make your home standout in the market
- shorten your days on the market with an affordable incentive
For buyers, evaluate an adjustable rate mortgage or request a seller sponsored rate buydown to:
- cut your mortgage payments creating affordability
- establish a foothold in the real estate market
- upsize or downsize your home while taking advantage of lower rate programs
Additional Resources
How the Fed Fell Behind on Inflation – a short video offering an historic perspective on the purpose of the Federal Reserve (The Fed), how we got behind on inflation and measures to reinstate economic balance.
Is Now a Good Time to Buy? – a high level explanation of what impacts mortgage rates and what is driving the current challenges surrounding mortgage lending.
by Sheila Landis for The Landis Group
