Inflation is hot…and so is real estate. But what does the future hold for both?
As we’ve talked about before, the Federal Reserve is late to the party in dealing with inflation and the latest data shows the rate of inflation is still rising.
Many are feeling the pinch in their wallets, at the gas pump, and at the grocery store.
For would-be real estate buyers that just begs the question…is now a good time to purchase a home?
Greg McBride, the Chief Financial Analyst at Bankrate, explains how inflation is affecting the housing market:
“Inflation will have a strong influence on where mortgage rates go in the months ahead…Whenever inflation finally starts to ease, so will mortgage rates — but even then, home prices are still subject to demand and very tight supply.”
While there’s no denying it’s more expensive to buy and finance a property this year than it was last year, it doesn’t mean potential buyers should pause their search. Here’s why…
History Says So – Real Estate Is A Great Hedge Against Inflation
During periods of inflation, prices generally rise across all areas of the economy.
Historically, however, real estate ownership is a fantastic protection against those increasing costs because buyers can “lock-in” what’s likely the household’s largest monthly fixed cost for the duration of your loan.
Not to mention, as property prices continue to appreciate, the home’s value will, as well.
That’s why Mark Cussen, Financial Writer at Investopedia, says:
“Real estate is one of the time-honored inflation hedges. It’s a tangible asset, and those tend to hold their value when inflation reigns, unlike paper assets. More specifically, as prices rise, so do property values.”
Secondly, nearly all industry experts agree that although the current rate of home appreciation can’t stay this hot, the likelihood of homes losing value is extraordinarily slim. As Selma Hepp, Deputy Chief Economist at CoreLogic, says:
“The current home price growth rate is unsustainable, and higher mortgage rates coupled with more inventory will lead to slower home price growth but unlikely declines in home prices.”
In Conclusion
Purchasing real estate is one of the best financial decisions that can be made during inflationary times. Buyers also receive the advantage of the added security of owning their property in a time when experts are forecasting prices to continue to rise.
If you are considering a purchase, your real estate search shouldn’t go on hold because of rising inflation or higher mortgage rates. Contact me for more…as it would be my pleasure to help you.
I can’t take credit for the popular phrase “Marry the house…but date the rate”. It’s being posted by mortgage professionals and real estate agents all over the place.
What does this expression mean?
It means that if you find a home you love, don’t let current interest rates prevent you from moving forward and buying it.
Essentially, don’t be afraid to buy the house you want right now because of external market conditions!
A mortgage does not have to be long term, in fact most people refinance their homes several times as mortgage rates improve or should they need to take cash out from their equity.
Is It A Good Idea?
Committing to the house doesn’t mean you have to commit to today’s financing forever. Buyers can always look for a better financing opportunity down the road and make a change when the time is right.
It is absolutely possible to change your financing to more favorable terms later, should better rates and products become available… and if rates only get worse, then you’ll be glad you married the house when you did.
Interestingly, the average tenure of a mortgage is under 6 years…meaning most homeowner’s either move or refinance their mortgages quite often.
It does look a recession is around the corner, which almost always results in lower mortgage rates. I know that sounds counter intuitive, but mortgage rates actually fall during recessions.
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.
What Buyers Should Do Now
Essentially, all of these factors listed above should combine for LOWER rates later this year into 2023.
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…
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.
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!
Mortgage interest rates just keep moving higher. They have risen nearly 1.5% points since January 3rd… and it seems like almost every day rates move up again.
The outlook for lower rates isn’t great right now, thanks mostly to the Federal Reserve’s handling of the money supply and out-of-control inflation.
How will the Fed’s recently announced quarter point hike to the Fed Funds Rate affect mortgage interest rates? The answer may surprise you.
The Federal Reserve
The Fed Funds Rate is not the same as a mortgage rate because it can change from one day to another, while mortgage rates can be in effect for 30 years. More on that here….
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.
You probably know that inflation has been rising significantly of late, and as a result, so have mortgage rates. Inflation is pushing 9%, the highest level we’ve seen in over 40 years. This has moved mortgage rates into the mid 4% range this week.
Essentially, The Federal Reserve has bungled their management of inflation and now have to make severe changes to offset the damage. This brings market instability and increased mortgage rates.
When the Fed hikes rates, they are trying to slow the economy and curb inflation. If successful in cooling inflation, mortgage rates will decline. History proves this during rate hike cycles for the past 50 years. Unfortunately, this isn’t an overnight fix.
Federal Reserve Chairman Jerome Powell
However, the Fed may also reduce its holdings of Mortgage Bonds, which can cause some interest rate volatility. And if inflation continue to surge, the Fed might not be able to do much to help. The situation isn’t great at this moment.
30-year fixed mortgage rates
The average 30-year fixed-refinance rate is 4.53 percent, up 20 basis points over the last week. A month ago, the average rate on a 30-year fixed refinance was lower, at 4.17 percent.
At the current average rate, you’ll pay $503.13 per month in principal and interest for every $100,000 you borrow. That’s $7.08 higher compared with last week.
Mortgage Rates and Treasury Yields – a great barometer
Fixed mortgage rates and Treasury yields tend to move together because fixed-income investors compare the returns they can get on government and mortgage-backed securities.
Investors compare yields on long-term Treasuries to mortgage-backed securities and corporate bonds. All bond yields (including mortgage backed securities) are affected by Treasury yields, because they compete for the same type of investor.
Mortgages, in turn, offer a higher return for more risk. Investors purchase securities backed by the value of the home loans—so-called mortgage-backed securities.When Treasury yields rise, investors in mortgage-backed securities demand higher rates. They want compensation for the greater risk.
You can see the rise in the 10-year treasury yield here…and mortgage rates have been following a nearly identical course over the last 3 months.
What Really Causes Rates to Rise and Fall?
Mortgage rates are determined by a complex interaction of economic factors, such as the level and direction of the bond market, including 10-year Treasury yields; the Federal Reserve’s current monetary policy, especially as it relates to funding government-backed mortgages; and competition between lenders and across loan types.
Because fluctuations can be caused by any number of these at once, it’s generally difficult to attribute the change to any one factor. Although in our current situation, inflation (and the Fed’s mismanagement of it) is the number one cause. When this is coupled with the large increase in government spending, you see a double dose of fear in the markets.
In today’s case, the Federal Reserve has been buying billions of dollars of bonds in response to the pandemic’s economic pressures, and continues to do so. This bond-buying policy (and not the more publicized federal funds rate) is a major influencer on mortgage rates.
On March 16, the Fed announced that it expects to begin reducing its balance sheet in May, meaning it will start reducing the overall amount of bonds it owns. This will be on top of its existing move to reduce new bond purchases by an increment every month, the so-called taper, which began in November.
Most experts agree that this “taper” will also move treasury yields and mortgage rates higher.
Moving Forward
There may come a point when mortgage rates drop back down and borrowers can enjoy some of the remarkably low rates they were available from mid-2020 through late 2021.
And throughout 2022, we could have periods when rates dip to some degree.
But for the most part, borrowers may need to come to terms with the fact that the days of record-low borrowing are behind us.
With that said, it’s important to put today’s rates into perspective. Compared to the rates we saw from mid-2020 through the end of 2021, the rates above look high. But historically speaking, locking in a 30-year mortgage anywhere in the 4% range is not a bad deal at all.
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!
Mortgage rates went from ridiculously low to “still not-so-bad” in just over a week. I can’t say that I recall ever seeing mortgage backed securities and mortgage rates having such gigantic swings in 6 days.
A flood of demand for refinancing combined with volatile credit markets last week caused mortgage rates to actually spike on Tuesday and Wednesday. By Thursday, buyers for mortgage debt had largely stopped making bids.
Borrowers who were looking at a 3.25% or a lower rate on a 30-year mortgage the prior week were quoted 4% on Tuesday and then above 4.25% on Wednesday.
When U.S. mortgage rates spiked last week, the entire market clogged up on Thursday and bidding on mortgage loans essentially stopped.
Secondarily, the Federal Reserve cut the federal funds to near zero on Sunday, adding to their earlier rate cut of a half a percent last week.
The Fed has also stated it will purchase $700 billion in bonds and mortgage backed securities on Sunday. Last week’s Fed injection was to allow banks to have the appropriate levels of cash reserves.
This new one is to bolster markets ahead of potential coming weaknesses.
Nearly all of this was in direct reaction to
the COVID-19 (Coronavirus) threat and fears of an economic calamity that could
be brought on by the virus.
Stock trading was halted for 15 minutes a few times last week due to a 7% drop in the market.
Treasuries tumbled to levels never seen before and the stock market dropped to a point where the Dow officially entered the bear market, ending the 11-year run in bull market territory.
Given all this, mortgage rates should have seen a serious decline last week. Instead, they’ve climbed nearly 0.75% in the last couple of days.
Why the disconnect? There
are 3 main reasons for this anomaly:
Capacity
Mortgage applications soared 55% last week from the previous week and demand for refinances rose to an almost 11-year high, as borrowers responded to the historically low rates.
Because of this volume, multiple investors actually stopped taking applications due to capacity concerns. Many mortgage lenders would no longer accept locks less than 60 days for refinances. Their systems are stressed and they do not have the capacity to originate, process, and underwrite such an extremely high influx of loans.
Essentially, mortgage lenders are trying to put 10 gallons of water in a 2 gallon jug.
So, investors are raising rates to combat the
surge in an attempt to slow things down a bit.
Out With The Old and In With The New
The surge in refinances has increased prepay speeds for securities backed by recent mortgages. This is essentially shortening the term of the investment and reducing the expected return of previous mortgages by the investor and servicer.
With this increased flood of refis, many previously funded and serviced loans are actually money losers now.
These losses for investors and servicers will see their revenue streams from their mortgage servicing rights dry up. Most mortgage servicers see a break-even of 3 years for each transaction – and most mortgages are kept on an average for 7, so there’s generally a tidy profit for the average loan.
A vast majority of the loans being refinanced
are less than 3 years old – many are less than 18 months old, as a matter of
fact..
So, investors are adding in some padded profits to cover those losses…and they do they by increasing mortgage rates they charge to borrowers.
Margin Calls
Because of the intense stock market drop this
week, many investors were forced to sell their most easily liquidated assets to
cover stock losses.
Many of those assets were mortgage backed securities
that had appreciated and were easily available to be sold.
In the short term, that made mortgage backed
securities more expensive, forcing rates higher in the short term.
Fed
Rate Cut and Mortgage rates
Also, many erroneously believe that Federal Reserve rate cut directly correlates to mortgage interest rates moving downward. As you can see by the piece I’ve written here, the Fed does not control mortgage rates. As a matter of fact, there have countless times where the mortgage rates moved higher the day fed cut the federal funds rate.
Note
that the federal funds rate is the interest rate at which depository
institutions lend reserve balances to other depository institutions overnight
on an uncollateralized basis. This is
not what drives mortgage rates – it does influence them, but does not “set”
them.
Treasury Yields and Mortgage Rates
The 30-year fixed mortgage rate and 10-year
treasury yield generally move together because investors who want a steady and
safe return compare interest rates of all fixed-income products.
This week, that relationship seemed to
disappear, as the 10-year treasury plummeted and mortgage backed securities
increased, due mainly to the 3 factors listed previously.
What Does The Future Hold?
It’s important to understand that mortgage
rates are still extremely attractive relative to historical norms.
Until things normalize a bit, we can continue to expect volatility in the marketplace, although yesterday’s Fed actions could move the market in the short term.
If you haven’t locked and started already with a refinance, then I recommend that you get ready to do so, as timing could be everything. Once the investors clear out some backlog and more economic data comes out (especially concerning COVID-19 ), mortgage backed securities will most likely get a boost and mortgage rates should ease back down once again.
My advice is to stay patient and be ready to move when the numbers work for you.
Secondly, inflation (the arch enemy of interest rates) is low, and the latest measures show that pressures are actually easing…again, good news for interest rates in the long term.
What Can You Do Now?
I recommend that you reach out to your mortgage lender right awayand put a plan in place for a future drop in rates. It would be my pleasure to give you some scenarios that might help you in your decisions making to know when/if you should make a move. Don’t hesitate to reach out to me for more!
Good news for home owners and buyers
alike – home appreciation remains strong.
Interest have moved to historic lows due to multiple factors, including the virus scare.
The Federal Reserve has cut it’s funds rate by .50 basis points in an attempt to “provide a meaningful boost to the economy”, per Chairman Jerome Powell.
With these things in mind, make sure you have a solid game plan to navigate the market right now. Think about inventory, equity in your home, second homes, and investment properties as strategies to build wealth.
It’s also a good time to take a look at refinancing any properties you own, as rates have dropped significantly over the last 2 years.
The housing reporting benchmark, CoreLogic, reported that home prices rose 0.1% in January and 4.0% year over year.
The year-over-year reading remained stable from last month’s report. CoreLogic forecasts that home prices will appreciate by 5.4% in the year going forward, which slightly higher pace. from the 5.2% forecasted in the previous report.
This is great news for would be buyers, as they can expect a great return on their investment!
Do reach out to me to find out more, as it would be my pleasure to help you determine the right strategy for today’s environment.
Thomas Eugene Bonetto
Mortgage Loan Originator
NMLS: 1431961
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.
