The upward momentum of home prices since February suggests the housing market is headed into recovery but mortgage rates have remained stubbornly high even trending back up since April. To follow is some perspective on why mortgage rates defy market forces and stay inflated and when we could see some relief.
Inflation
Inflation has steadily trended downward since Fall of last year, and mortgage rates began to follow. Under normal market driven conditions, mortgage rates would steadily decline in tandem with Core CPI inflation. But we are not yet operating under normal market conditions. The ripples from the spike in the Federal Funds rate from zero, to 5.00%-5.25% in just over 12 months has cemented uncertainty into the market for the near future.
Debt Ceiling and the Banking Crisis
Just in case our economic environment wasn’t volatile enough, the threat of default on our debts and collapse of some small financial institutions fanned the flames of caution keeping mortgage rates elevated. With a decided outcome from those rather epic events, experts are taking a wait and see attitude as the ripples of the last 36 months roll out of the financial sectors.
Home Prices
The recent bank failures were not reminiscent of 2008. In 2008, the failures were directly tied to credit issues. In 2023, credit played no role in the default; asset duration was the sole cause. Translation, money got expensive too fast for some smaller institutions to support. A likely outcome will be a few updates to required reserves that could have prevented the level of default that took place. What those recent defaults will not do is drive foreclosures from credit defaults like we saw in 2009 and there after for several years. Current home prices are here to stay for the foreseeable future.
Fed Announcement
Will they or won’t they do it again is the looming question. Here’s what we know:
- On June 14th, the Federal Reserve paused the streak of ten consecutive rate hikes taking into account “the lag with which monetary policy affects economic activity”.
- The statement was followed by the reminder the Fed (also referred to as the Committee) will continue to reduce its agency debt including holdings in mortgage-backed securities, already under pressure and keeping mortgage rates elevated.
- The door was left open to resume hikes as indicated by the statement “The Committee is strongly committed to returning inflation to its 2 percent objective.”
In the meantime, the positive news is momentary cause to celebrate as one day later, the MBS market has improved signaling we could see mortgage rates head down assuming the market response sticks around.
Mortgage Rates Drop When…
Since mortgage rates typically follow the same trend as inflation, specifically the Core Consumer Price Index (CPI), not the Federal Funds rate, they should be trending down. Here’s a recap:
- Inflation growth has slowed but we are still above of the Fed target of 2% baking uncertainty into the financial markets as a whole.
- Annual inflation is trending at 4%, down from the previous period of 4.9% and well under the peak in 2022 of 9.1%.
- The rapid growth in the Federal Funds rate directly impacted all segments of the banking industry as we saw earlier this year with some smaller, highly leveraged institutions failing.
With the potential of additional hikes in this uncertain economy, ALL sectors, including the mortgage industry remain on high alert and in a conservative stance equating to higher mortgage rates in an effort to hedge against what’s ahead.
A Return of 5% Rates
A few months with nominal job gains, no bank defaults, the absence of a debt ceiling crisis and we could find stability and a calming of mortgage rates. Experts are widely mixed on their projections and many flat say, wait and see. Optimists say Fall of this year will bring mortgage rates in the 5’s, those in a more conservative stance don’t see rates under 6% before sometime in early 2024. In other words, we don’t know.
The net of the conversation is we won’t see mortgage rates on a steady decline until volatility of all these factors calms down.
Just a heads up, the commercial real estate market is bracing to absorb some $1.5 trillion in commercial mortgages held primarily by smaller banks that will be coming due over the next 24months. Occupancy of expensive office space has not fully recovered with the adoption of working remote being a new normal across a multitude of industries. Another unknown looming on the horizon contributing to the wait and see.
Improve Affordability with a Rate Buydown
Clients are buying homes with financing tools to enable affordability. Rate buydowns, whether temporary or permanent, drive down monthly payments and offer greater benefit to both buyer and seller than equal dollars put toward a price reduction. If you’re shopping for a home, ask your realtor about the option to include a seller paid rate buy-down. If you’re selling, make your home the obvious choice with a rate incentive included.
