I’ve been asked by many real estate agents and clients about how this week’s banking uncertainty might impact the real estate and mortgage markets.
Two banks have collapsed since last Friday and the federal government jumped in to guarantee depositors at those institutions. However, there’s still a lot of uncertainty about what this means to the markets.
Fortunately, depositors at Silicon Valley Bank — which failed Friday after a bank run — and New York-based Signature Bank — which collapsed Sunday — will see their money guaranteed by the federal government.
The U.S. Treasury, Federal Reserve, and Federal Deposit Insurance Corp. (FDIC) announced measures to guarantee that depositors would be able to receive all of their money back from those failed institutions.
This situation looks nothing like 2008 when subprime lending and easy credit spurred a foreclosure crisis.
As a matter of fact, many experts see mortgage interest rates coming down because of this incident.
“I don’t think the bank failures will have a material impact on the housing market in the western U.S. The failures are idiosyncratic, and given the government’s decision to pay all depositors, I don’t expect there to be a problem in the broader financial system,” Mark Zandi, chief economist at Moody’s Analytics, told MarketWatch.
He added, and “if anything mortgage rates may decline given the flight to quality into the bond market and prospects that the [U.S. Federal Reserve] may delay its rate increases.”
Mortgage lenders — which includes many banks — may not necessarily see problems with liquidity, said Sam Hall, property economist at Capital Economics.
“The direct impact on the housing market is likely to be small. Moreover, SVB’s holdings of residential mortgage-backed securities (MBS) account for a very small share of the overall market, so the forced selling of those assets is unlikely to put any downward pressure on MBS prices,” he added.
Al Otero, portfolio manager at Armada ETF Advisors, also said that the two banking failures may have forced the Federal Reserve to not raise rates, which could help the housing market.
There’s a rally in rates across the yield curve, Otero said, “and an expectation that the Fed will now ‘pause’ raising the funds rate at its March 21-22 policy session.”
“We could see a material reduction in mortgage rates going into the spring sales season,” he added, “which would be a substantial positive for the housing market.”
The bank failures may actually soften the Fed’s stance on interest rates.
“The hawkish tenor of Fed Chair Jerome Powell, in his Senate testimony last week and with the February rate hike, indicated a 50-basis-point increase was likely for the March rate decision” say’s NerdWallet’s Anna Helhoski.
But the Silicon Valley Bank and Signature failures have clouded that outlook.
In a widely reported analysis of the failures, Goldman Sachs said it no longer expects the Fed to deliver any rate hike at the March 22 meeting, adding they had “considerable uncertainty about the path beyond March.”
Michael Feroli, chief U.S. economist at JPMorgan Chase & Co., was widely reported saying he expects a 25-basis-point hike at next week’s meeting.
The heightened economic risk brought on by the failed banks and the government’s response is likely to bring a short-term boost to the housing market by way of lower mortgage rates.
Secondly, the Federal Reserve might now re-think forceful rate increases that appeared imminent just weeks ago. That should trigger lower mortgage rates, as well.
For buyers shopping now, a drop in interest rates would be a welcome boost to affordability – so reach out to me for more details, as it would be my pleasure to help would be borrowers navigate this environment.
FHA mortgages have long provided first-time homebuyers and those with less-than-stellar credit an affordable way to achieve home ownership. But one of the main drawbacks of these mortgages has been that their mortgage insurance costs are relatively high.
Reduced mortgage insurance rates go into effect today for many FHA borrowers. The typical borrower will pay 0.55% of their loan amount annually in mortgage insurance costs (as opposed to the .85% rate previously) – a decrease of 30%!
The White House announced Wednesday that the US Department of Housing and Urban Development (HUD) will lower annual mortgage insurance premiums (MIP) on FHA mortgages. These loans are insured by HUD’s Federal Housing Administration.
Mortgage insurance is required on all FHA loans (regardless of down payment size) to allow for more flexible qualification requirements, like a lower credit score.
FHA mortgages are used for primary residences, not 2nd homes or investment properties.
Overview of the Changes
Mortgage insurance is paid as a percentage of the borrower’s loan amount, and how much an individual pays depends on how much they borrowed, their down payment, and the loan term. Currently, most borrowers pay an annual mortgage insurance rate of 0.85%.
To show the monetary value of this change, a borrower in a $265,000 home would save about $800 per year. A borrower with a $467,700 home – the national median home price in December 2022 – would save more than $1,400 annually, according to the HUD press release.
By reducing the costs for this type of loan, more people may be able to afford owning a home.
This is especially true for low-income and first-time home buyers, who tend to benefit from FHA loans the most.
This change is a welcome reprieve for Americans who, in the last year, have experienced higher home prices, housing costs and mortgage rates.
The Bottom Line
By reducing the costs associated with getting an FHA mortgage, HUD aims to make home ownership more affordable.
Nearly 84% of FHA mortgage borrowers are first-time homebuyers, and 43% of FHA borrowers are low income, according to HUD.
Also, FHA mortgage rates are generally lower than conventional rates. So, it will be in buyers’ best interest to have a mortgage pro who can work with them to figure out which loan program would be the best for their current situation. It wouldn’t surprise me to see conventional loan originations drop because of these FHA changes.
Where Can I Get More Information?
Contact me directly to discuss your current situation and how you might be able to take advantage of today’s FHA changes. It would be my pleasure to help you!
One final thought, owning real estate allows individuals to benefit from inflation on that large asset. The leverage from using borrowed funds to finance the purchase creates leverage that additionally works in favor of the buyer.
And residential real estate generally does extraordinarily well during inflationary/recessionary periods!
Welcome to the Lending Coach forecast for housing and mortgage rates for 2023 and I look forward to sharing some of my thoughts and insights for the upcoming year.
I know that housing is so important and so vital to all of us, and we’ve seen home prices come down just a little bit after soaring to record highs.
If you are interested, here’s a video that I’ve put together that takes a deep dive into what real estate agents, buyers, and borrowers can expect in 2023 regarding housing and mortgage rates.
I’ll discuss supply and demand, inflation and mortgage rates, housing affordability, as well as housing trends that will impact both buyers and sellers. I’d invite you to check it out and pass it on to anyone you know that might benefit!
So what does 2023 have in store? Well, as we know with everything else, supply and demand will play a role.
And impacting demand will be interest rates. Mortgage rates have risen dramatically in 2022, and we’ve seen housing demand slow down. But interest rates have started to show some signs of improvement since mid-November.
I think that’s going to continue into 2023, and I’d like to show you why.
Here’s what will be covered in this article:
The 10-Year Treasury Bond and the 30-Year Mortgage Rate
Housing Supply and Demand
2023 Housing Forecast
2023 Mortgage Rate Forecast
As I’ve mentioned many times, interest rates, and mortgage rates in particular are driven by inflation – because inflation erodes the buying power to the recipient of that fixed payment they are receiving.
The investor’s buying power erodes faster if inflation is higher, so their only defense to stabilize profits is to charge a higher interest rate.
But as inflation comes down…mortgage rates come down. So let’s take a look at how mortgage rates do take their lead from inflation.
In this slide, the blue line represents the 30-year mortgage rate and the red line tracks the Consumer Price Index, or the core inflation rate.
When Inflation rises, mortgage rates rise…and when inflation softens, mortgage rates soften.
You can see that in August of 2021, inflation spiked, and mortgage rates started to respond too. Now, we had a period here where the Federal Reserve purchased a bunch of mortgage-backed securities – and that is called “quantitative easing” or QE, in order to stabilize the economy during Covid.
And during their period of QE, the federal reserve kept mortgage rates artificially low, right around 3%, and you can see that from January 2020 until January 2022. But as inflation started to rise from very low levels, the Fed told us that this inflation was transitory, but they were wrong.
The Fed kept on buying enough mortgage bonds to tie them to that 3% mortgage rate. Finally, the Fed understood inflation was not transitory, that they were behind the curve, and inflation was rapidly increasing. Mortgage rates started to move higher. Once the Fed stopped buying mortgage-backed securities, rates did what they always do, they followed inflation upward.
So as inflation rose, mortgage rates rose when inflation took a little bit of a reprieve, so did mortgage rates, they moved lower with inflation. Then inflation started to move up, and sure enough, mortgage rates did as well.
As we’ve seen inflation come down at the end of 2022, mortgage rates have made some meaningful improvement, although they’re significantly higher than were a year ago.
The rate of inflation on the core Consumer Price Index (CPI) closing out 2022 was at 6% on a year over year basis. So, let’s take a look at the most recent data that we just received through November.
If we look at each month’s individual reading of inflation for the 12 most recent months, you essentially come up with 6%, although there’s a little rounding and compounding.
So, as we take a look moving forward, what we are going to start to do is replacing these numbers from 2021 and early 2022. Here you can see December of 2021 (.6% shown in yellow above) will be replaced with new numbers for 2022.
You can see that the more recent data is, the more reduced inflationary pressures are. We know the economy’s slowing and that we’re headed for a recession (if we aren’t in one already). This should all mean that we’ll see lower monthly inflation readings, replacing higher inflation readings that will now be taken out of the equation.
We should see inflation reduction in January, February, maybe not so much in March, but certainly April, may, and June, which is why I believe that inflation makes very meaningful improvements in the first half of 2023.
10-YEAR BOND and the 30-YEAR MORTGAGE RATE
Now, one other thing to take very important note of is the relationship between the US 10-year treasury, and that’s illustrated in blue and 30-year fixed rate mortgages illustrated in yellow. Now this compresses 35 years in one single chart. You can clearly see there’s very close relationship between the two.
It’s not day-to-day and it’s not exact, but there’s kind of a range that this gravitates towards, and it’s about 175 to 200 basis points. So, in the past, if the 10-year treasury were, let’s say, somewhere in the range of four, then mortgage rate should be somewhere in the range of six.
If the 10-year treasury was at five, mortgage rates would be somewhere in the range of seven. This has been going on relatively consistently for 35 years until what we had seen towards the end of 2022, when the difference between the two of them. Was not 175 to 200 basis points, but 300 basis points.
What happened that changed over the past 35 years? It has everything to do with loan servicing and the belief that interest rates will go down soon.
Very few investors hold their mortgages on fixed rate products. That mortgage is sold in the secondary market to a loan servicing company.
Now, under normal conditions, mortgages can last for many years – generally between 4 and 8 years on average – and these servicers expect to collect their servicing fee for a long time.
But now, with above 7%, most analysts are thinking that these rates will not last, and they will come down relatively soon…and that means the servicing would not last on these mortgages because people will refinance or pay off their mortgages.
Most folks aren’t going to keep those 7% mortgages for a long time. And because of this, it sucked out all the servicing value and expected profit for these servicers.
Now, as the 10-year bond drops (and I’m forecasting to go lower and lower), not only will mortgage rates drop, but they will drop faster as more servicing value gets added in because let’s face it, a 6% mortgage will be on the books longer than a seven. So that’s more value for the loan servicer.
And we’ve already started to see this as we ended 2022, this spread was narrowing at the end of the year. As the 10-year treasury moved closer to that three and a half, three and five eighths rate, mortgage rates already started to move into the low sixes.
So that spread, which was about 300 basis points, are already narrowed to something closer to about 270 or 250 basis points. I do think that 10-year treasury gets around 3 because of lower inflation, which means mortgage rates should follow suit. And if we do get that 3% bond yield, we should start to get some more normal servicing values.
And that means mortgage rates should be closer to the 5% range around the spring of 2023.
Now it truly looks like a recession is coming, if we are not already in one today.
The problem with knowing when you’re in a recession is that the National Bureau of Economic Research must declare that you’ve been in a recession, but they don’t typically do it till a year after the fact!
Funny thing, we typically are in and out of recession before the experts tell you. However, there are many signs pointing in that direction.
Take a look at the overall amount of credit card debt. Many are living on credit cards and are also tapping into savings.
These bumps in the graph are the three stimulus packages that helped people with savings, but that’s been all drained out and we are even moving much lower than pre-covid levels.
Essentially, people are keeping the lifestyle, but they’re using credit cards and savings to maintain it. Even this has an expiration date and limitations – and when that hits the proverbial brick wall, the recession will become evident.
Now we know that there are also things that are proving to be important, signs like yield curve inversions.
The yield curve inversion is when you take longer maturities that are supposed to have a higher rate of interest, that now yield a lower rate of interest than their shorter-term counterparts. And it’s a very reliable recessionary indicator.
So, when you take the US 10-year treasury yield and you subtract the three month treasury, that gives you what’s called the “yield spread”. Now the 10-year bond is supposed to be higher yield than the three month, so a bigger number minus a smaller number, it should be positive.
But the yield on the three-month treasury is actually higher than the 10-year. So, when you take the 10-year minus the three month, you’re getting a negative number. And when that happens, the spread breaks underneath the 0% line on the graph above.
That’s shown in 1980, 1992, 2002, 2008, and 2020….and the grey vertical lines on the graph represent recessionary periods. We are very negative in the yield spread currently, so we are either right on the cusp or about to head into a recession.
As you can see, this is a very reliable indicator of recessions…and during recessions, mortgage rates decline, as shown in the graph above.
HOUSING SUPPLY AND DEMAND
Now let’s shift our focus to housing and the supply and demand component. Demand will come from new household formations – and we have been chugging along at forming households at a rate of about 1.7 million a year.
A new household formation is where you have a family member who’s living at home, and one of the children comes of age and they move out and they get their own place.
Some of those people that were going to form households went into a bit of hibernation waiting for rates to come down. Fortunately, this is kind of pent-up demand in waiting.
At the same time, supply is softer, as builders have slowed things down. They’re completing about 1.5 million homes, but yet there’s about a hundred thousand homes per year that have to be replaced because of aging.
So we’re only seeing about 1.4 million homes come on the market and currently with that hibernation about 1.3 million household formations.
So that’s why the housing market has slowed for now an activity. But when rates come back down, we will have household formations go back to its normal rate of about 1.7 million, and that might overwhelm the supply a bit.
And that should be very supportive of prices and builders. They’ve slowed things down, permits have slowed. They learned their lesson from that housing crash in 2006 to 2009. But when formations pick up, builders will start to ramp up again.
While many in the media want to say it’s a housing crash, that’s not nearly the case.
Look, in the last 10 years, prices are up 115%. In the last couple years, they’re up 39% Now, even with rates at 7%, we’ve seen prices come in a little bit, they are down about 2.5%, but that’s not very much, especially considering the higher mortgage rates.
And the reason for that is because inventory is very tight. Secondly, rents are still pretty high, and people want to buy homes. As I mentioned previously, buyers are just hibernating for a bit, showing pent up demand. But remember, when rates come down, things will change.
Another major aspect that plays into the 2023 forecast is housing affordability. I really think affordability really needs to be explained because when you do the math, it paints a very different picture than what the media is telling us.
Let’s assume, for example, that last a borrower wanted buy a home and take out a mortgage of $400,000 to buy it. Last year you get a rate around 3.5% and your principal and interest payment would be just under $1,800.
Things have changed this year. As we are at the end of 2022, home values in the past year have gone up about 10%, which means to buy a similar type home this year, compared to last year, you’d have to spend 10% more or take out a mortgage 10% higher. That means you need to take out a mortgage of 440,000.
Today’s rates as we enter 2023 are closer to about 6.25%, so that makes the affordability gap here quite large, a little over $900 per month.
The problem here is, it only tells half the story, and the media won’t tell you this…but, a year ago if you purchased this home, the average income of a household buying this home was about $9,000 a month.
But now ADP, the payroll company, tells us that if you kept your job this year, your income went up 7.6% last year. If you switch jobs, it went up an astounding 15%.
Let’s take an average and weight it, and use about 9% increase in income, which is quite significant, over $800 a month increase.
However, what’s also happened at the same time other things start to add up because we’re paying more for gas and food and services.
Those payments have gone up so much, and while their income’s gone up, it’s not enough to cover this gap. Hence, buyers are taking things a little slower.
But what we must start to do is think forward…and start to think ahead to 2023. Next year, what’s going happen to these incomes? Well, they, they’re going up at 7.6% now, but let’s be a little more conservative and say they only go up at 5%.
Well, if they do, then a borrower’s income will have gone up next year, from $9,000 in 2021, to 9,800 in 2022, to 10,300 in 2023. That means borrowers are making $1,300 more based upon this increase. Interestingly, their payment has gone up $1,100 a month more.
In this case, their increase has pretty much mitigated all of the negativity of the market change. So housing affordability may very well improve in 2023.
Now, if I’m right and inflation retreats (and it’s showing very convincing signs of going down right now) and couple that with a recession…all of this will drive mortgage rates down. It would certainly be understandable to see that relationship between the 10-year treasury and mortgage-backed securities move closer to a 5% mortgage rate.
Interestingly, that might make 2023’s affordability better than in 2020!
I also believe that inventory will remain tighter than normal.
My housing forecast shows low, single-digit home appreciation for most of the US with a pickup in buying activity, due to lower inflation and mortgage rates.
Rents are still expensive and rising, not giving people much of an alternative, as may know that buying a home is a much better strategy than renting in the long term.
MORTGAGE RATE FORECAST
First, let’s look at some of the headwinds…there’s global quantitative tightening, so money’s getting tighter. There’s also lack of foreign central bank buying, which will impact the mortgage backed securities market
And look, there is a lot of debt out there that needs to be financed too.
Our tailwinds, on the other hand, are lower inflation. Retail inventory is building to higher levels, and that means there will be sales driving down prices. Mortgage servicing value has increased…and there is likely going to be a recession where rates decline.
I believe we will see 30-year fixed rate mortgage rates move into the 5% range during the first half of 2023, and the 10-year treasury near 3% or lower.
I do believe there’s good news ahead and that there’s reason for optimism as we look to 2023.
Would you like to find out more? Contact me to discuss your current situation and how you might be able to take advantage in today’s environment. It would be my pleasure to help you!
It’s easy to fixate on headlines about rising interest rates, but Simental says it’s more important to focus on your specific financial situation rather than the market at large.
“Try not to follow where interest rates are at so much,” Simental says. “The market is always going to be like this. It’s going to go up and down and it’s going to have good months and bad ones. But the important thing is to stick to your plan.”
“The market is always going to go up and down. But the important thing is to stick to your plan.”
Don’t Put Too Much Stock in Headlines
There are always news stories and headlines about the housing market, but be careful about consuming too much. These often highlight the most extreme happenings in the market and are indicative of more general trends — not necessarily the rates or experience you’ll see if you buy a home.
“I always tell my clients, ‘Look, If you are in a good place to buy a house, then right now is a good time to buy a house,’” Simental says.
“If you’re not, then it is not a good time to buy a house — and that is why it is so important to get with an individual who’s really going to look out for you, your finances, and your specific situation… Speak with a professional who’s doing this day in and day out.”
Know Your Finances
To qualify for a mortgage at today’s higher rates — and make sure you get a loan you can afford both now and down the line — having a good handle on your finances is critical.
Simental stressed the importance of looking at your financial stability over the long term. As he put it, “Are you going to make a job switch or take fewer hours, or are you going to be on maternity leave?” These types of things impact how much home you can afford and qualify for.
Ideally, you want to get to a place where your earnings are consistent and reliable. This will lower the risk you present to lenders and make it easier to qualify for a loan. “Get consistent with your income,” Simental says. “Make sure that you have all of your finances in order and make sure that you are working full-time.”
Your debt-to-income ratio (DTI) is a big factor in your home-buying budget, so pay off debts where you can before you start house hunting.
“I would honestly suggest eliminating all of the smaller payments that you are paying — whether on your credit card or [a] small student loan that you can pay off — because that’s just really going to harm you when you go into the qualifying process for a home,” Simental says.
According to Simental, your DTI will need to be under 45% or 50%, depending on the loan program. “That includes your mortgage payment. And if you have car payments, student loans, credit cards, personal loans, that all gets taken into consideration and gets looked at, and it can hurt your application,” Simental says. “Make sure to take care of these debts.”
Improve Your Credit Score
Your credit impacts both your ability to qualify for a mortgage and the interest rate you’re quoted.
“Take a look at your credit score,” Simental says. “If your credit score is not where it needs to be or not where it should be, make sure that you come up with an action plan to get it to the best possible score you can. The higher the credit score, the better the interest rate and the better loan program options that you will have.”
If your score is on the lower end, a good loan officer will help you build a roadmap to improving your credit.
“Even if you’re not ready to buy right now, connect with a loan officer and let them know ‘Hey, I want to run my credit. I want to see where it’s at. I want to see if there is a room for improvement,’” Simental says. Ask them, “‘What do I need to do so that I can have the best possible credit score?’”
Whether you’re ready now or just preparing to buy a house, reach out to me, as it would be my pleasure to work with you to get started!
I’d be more than happy to take an in-depth look at your income, credit, and current mortgage rates, then tell you what you’re able to afford. If you’re not in an ideal position to buy right now, I can help you develop a strategy to get you there!
Thomas Eugene Bonetto
Mortgage Loan Originator
About The Coach
Tom Bonetto has been helping his customers and players achieve their best for nearly 30 years. His goal is to provide both a superior customer experience and tremendous value for both his business associates and his players alike.
This is not a commitment to lend. Prices, guidelines and minimum requirements are subject to change without notice. Some products may not be available in all states. Subject to review of credit and/or collateral; not all applicants will qualify for financing. It is important to make an informed decision when selecting and using a loan product; make sure to compare loan types when making a financing decision.
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