Many experts are warning of a potential recession later this year, which has many questioning if it’s a good time to purchase a home…and worrying about mortgage interest rates, in particular.
We know that inflation is at 40-year highs – and as a result, mortgage rates are up over 2% in the last 4 months.
This is one of the most rapid increases in mortgage rates we’ve seen in recent memory.
With all of this in play, what’s the outlook for the future of mortgage rates and housing – and what’s the best strategy to navigate these rough waters?
Let’s take a look at a what’s happening today and also consider a little history of Federal Reserve rate hikes and recession.
Believe it or not, we might be in for an upcoming perfect storm – and in a good way for borrowers.
Inflation
Mortgage rates are primarily driven by inflation, which erodes the buying power of the fixed return that a mortgage holder receives. When inflation rises, lenders demand a higher interest rate to offset the more rapid erosion of their buying power.
When the Federal Reserve increases the federal funds rate, they are trying to slow the economy and curb inflation. If successful in cooling inflation, mortgage rates will indeed decline. History proves this during rate hike cycles for the past 50 years.
Here’s a quick look at what’s happened historically when the Federal Reserve raises the federal funds rate:
Notice how rates actually DECREASE after inflation starts to slow.
Most experts hope that the Federal Reserve is aggressive at tackling inflation, as they are really late to the game. Better late than never, I guess!
By the way, don’t be fooled if you see inflation numbers come in lower over the next few months. Many in the media have talked about “peak inflation” as right around the corner. I don’t buy it.
Peak inflation will be in September/October of this year. Just watch.
Also, it does look like some of the supply chain issues that have plagued us (and has contributed to inflation), might be worked out by this fall. Or at least, we can hope for that!
Recession
The first quarter US Gross Domestic Product (GDP) reading came in at -1.4%. That means the US economy actually shrunk by nearly a percent and a half. Not good news, to be sure.
The definition of a recession is back-to-back negative GDP quarters. So, if the April-June numbers are negative, we will officially be in a recession. And this seems likely. If not now, it will be soon.
The Fed has stated that they will be moving the federal funds rate higher in the coming months – possibly even 3 percentage points this year.
The thick grey bars in the chart below demonstrate recessionary periods…and they correspond very closely to the Federal Reserve interest rate hikes.
Secondly, when you take a look at the combination of high inflation and low unemployment, a recession always follows:
Finally, another great barometer of a coming recession has to do with the difference in yield between the 10-year treasury bond and the 2-year treasury bond.
Investopedia: An inverted yield curve describes the unusual drop of yields on longer-term debt below yields on short-term debt of the same credit quality. Sometimes referred to as a negative yield curve, the inverted curve has proven in the past to be a relatively reliable lead indicator of a recession.
As you can see by the chart below, we are nearing that point now where we have an inverted yield curve.
So, when you take a look at negative GDP growth, the combination of inflation/high-employment, and the inverted yield curve, it is most likely that we will see recession very soon.
Mortgage Rates
As stated earlier, mortgage rates generally FALL during recessionary periods.
This might seem counter-intuitive, but history bears this out. Take a look at the chart below:
Notice that mortgage rates actually fall during recessionary periods. You can see the recessions are pictured in the dark blue verticals, and mortgage rates are highlighted inside of them.
Also, one of the few areas that seem relatively immune from recession is the housing market. Historically, one of the safest bets during recession is real estate.
The chart below shows how housing stays quite resilient during and through recessions:
Looking back at eight of the nine recessions since 1960, home prices significantly increased or at least remained stable each time during and after the recession. One of the reasons this occurs is because interest rates significantly fall during recessionary periods.
So, things look to be lining up for lower rates ahead!
Potential for Perfect Financing Storm
Essentially, all of these factors listed above combine for LOWER rates later this year into 2023.
So, what’s a buyer or home owner to do now?
Of course, things can change, but it sure is looking like a recession is on the horizon, which will undoubtedly bring lower mortgage rates.
Well, waiting to purchase a home and “timing the market” is one option…but it’s almost always a bad idea.
Why? Because no one knows exactly when rates will hit rock bottom – and home prices will continue to accelerate.
More importantly, buyers will miss out on the gains of owning a home. Homes increased in value over 15% last year in the west…and things aren’t getting any cheaper. More on trying to time the market here…
Today’s housing market is extraordinarily strong, as there is record low inventory:
On the other side, there are more new households than ever – and these are competing for fewer homes:
Strong demand and tight supply should continue to be supportive of home price increases, so prices are not coming down.
Again, what’s a potential buyer to do? Fortunately, there’s a great solution here.
Purchase Strategy
I recommend making your purchase now – and NOT paying extra discount points to lower your interest rate. As a matter of fact, you could use “negative” points to help offset any closing costs.
Instead of paying discount points to access lower mortgage rates, borrowers can receive credits from their lender and use those monies to pay for closing costs and fees associated with the home loan.
Yes, the interest rate might be slightly higher, but you will want to refinance this mortgage when rates drop later this year or next year! This will also limit your out-of-pocket fees for the initial transaction.
Refinance Strategy
If you are considering refinancing, now might be a good time to do a “cash-out” refinance and take advantage of all of the equity that’s been built over the last 5 years and pay down debt.
Rebates can be good for refinances, too, as loan’s complete closing costs can be “waived”. This allows the homeowner to maximize the amount of money received from the refinance transaction.
Then, refinance in early 2023 when rates come down. That means you can have the cash now, and a more-than-likely lower rate later.
In Conclusion
Although things look a little grim currently, the future is actually looking bright for mortgage rates later this year and into next year.
Would you like to find out more? Contact me to discuss your current situation and how you might be able to take advantage of today’s market. It would be my pleasure to help you!
