Uncertainty, especially surrounding monetary policy is a breeding ground for rate increases. The near memory of the bottom falling out of the housing market in 2008, the accelerated rate of home appreciation over the past 24 months, and rising inflation has consumers on high alert fearing another housing bubble. Unpacking the forces behind the events of today and those of 2008 provides a factual perspective designed to offer you insights from an insider perspective.
Why did mortgage rates spike?
Three Fed rate hikes in the first half of 2022 popping the market 150 basis points higher in just over 3 months, marks the first uptick since 2018. Increases were anticipated to curb inflation, but both lenders and secondary markets were surprised by two factors. The extent of the increases and the change in monetary policy supporting lower rates. The March 16th announcement from the Fed communicated a gentle approach to rate hikes, gave us a 25 basis point increase, and no impending plan to begin liquidating their investments in mortgage-backed securities.
The May announcement of a 50-point basis hike coupled with a change in monetary accommodations supporting lower rates effective June 1, pushed fixed rates quickly to the mid-5 % range.
The spike in mortgage rates is largely driven by the Fed’s efforts to curb inflation, uncertainty rumbling through the secondary markets and compression in lender margins. The June 16th addition to the funds rate of 75 basis points, and an anticipated July increase of equal vigor, has moved rates firmly into the 5’s and 6’s for 30 year fixed rate loans.
Right sizing the lending industry
The outcome of our market forces is referred to by industry insiders as right-sizing factors. The lenders chasing the low-hanging fruit with little depth of product suite relying primarily on price (low market rates) will go away. Digital lenders are shrinking, being bought up, or closing their doors. Industry-wide, we see layoffs, especially among lenders with low capital reserves who staffed up, as most of us did, to support the boom of the past two years. Lenders well-capitalized will continue to do well. Lenders unable to sustain short-term periodic losses over the coming months will be forced out.
How long will uncertainty drive pricing?
The best minds that study our industry are projecting 6 to 9 months. Essentially that means margins for lenders will remain tight, mortgage rates will steady before climbing again and we wait to see the impact on inflation. Even as inflation begins to stagnate, pricing has been built into the secondary markets to hedge against the potential of a rate decrease. This practice protects the investors of those mortgage-backed securities against the type of losses that can exacerbate a recession.
Will we see rates below 5% anytime soon?
Assuming inflation is under control as we exit 2022, the potential looms for a recession into 2023. A recession could shift rates downward, though unlikely below 5% as historically those levels appeared only when accompanied by a stimulus infusion. Thirty year fixed mortgage rates don’t mirror the Fed’s benchmark rate but rather track the yield on 10-year Treasury bonds, expectations surrounding inflation and investor reaction. None of the market factors supporting a near term decline in rates exists.
Will home prices plummet like 2008?
The sentiment is a resounding no. Will home prices level off? The answer, yes, as supply begins to build back toward demand. That is a key difference when comparing the rapid home price rise of late to the gains that precipitated the 2008 housing drop. The Great Recession found the housing industry with excess supply and a lending environment where both traditional banks and private lenders funded loans with little data on the borrowers. As reflected in the chart below, debt to equity ratios were much higher in 2008 than today and the percentage of borrowers with credit scores under 700 was a significantly larger portion of the overall mortgage debt.
Fast-forward to 2022 where we have inflation and tight housing supply driving interest rates and home prices up, we don’t have excess housing supply or high debt to equity prevailing. In 2018 the estimated housing shortage was 2.5 million units according to Freddie Mac’s Chief Economist, Sam Khater. By year end 2020 that deficit grew by approximately 52% to 3.8 million units. These shortfalls do not support significant home price drops anytime soon.
Delinquency rates continue to decline while homeowners experience an average 32% increase in equity according to a CoreLogic report on loan performance. Lending practices of the pre-2008 era that thrived with sub-prime markets and no income verification loans have dried up precluding the likelihood of mass defaults.
You’ll never buy if you’re timing the market
If you are awaiting the big collapse to dive in, there are no economic factors supporting such an event and you are missing the opportunity to grow your portfolio with real estate investment(s). Following trends and data is a savvy approach to understanding the market. Home prices year over year April 2021 to April 2022 increased by 20.9%. Thankfully we are seeing the market calm, but the experts have no gloom and doom housing bubble forecast. Instead, estimates return us to a comfortable 5.6% annual increase year over year moving through 2023. Housing prices, just like other financial investments fluctuate, but to date, real estate has always offered a return to steady sustainable growth.
Are you buying at the top of the market?
Perception was we hit that back in 2016 and again in 2018 according to most housing experts. Back to that concept of timing the market-we can’t predict the future or time the markets. We can learn from the past and provide lending practices that preclude a repeat of mass foreclosures and result in rapid declines in property values. With average returns across all categories at 5.9% over a 10-year period as seen in the data below, history supports owning a home.
Offering you confidence
Fairway is ranked second in the nation among retail lenders funding over 65 billion in mortgage loans in 2021 according to the Scotsman Guide. We are privately owned and do not answer to investors or outside shareholders seeking a quick return. Founded in 1996, we have grown to over 10,000 employees and lend in all 50 states. Our full suite of loan products has delegated underwriting authority ensuring we close home loans within 30 days of a signed agreement. We answer to the clients we serve offering sound advice, competitively priced products, and unparalleled service.
by Sheila Landis for The Landis Group
