Where are mortgage rates going?
If history is any guide, then they aren’t going to start falling until the Fed pivots. Mortgage rates usually hit a peak when the Fed fund rate peaks or 0-3 months before and mortgages don’t fall significantly until the Fed fund rate falls. A pivot away from rate hikes doesn’t always translate in much lower rates, they seesaw within a band versus fall.
So what do we know?
The Fed fund rates have not yet peaked and we can expect the Fed to raise the fund rate 2 more times unless inflation shows a significant sign of deflation. With potentially 2 more rate hikes of 25bps, the fed fund rate should peak at 5-5.25%. Based on the Fed guidance we can expect rates to continue rising in the next few months and hover in the high 6% if not hit a double top of 7%.
If inflation cools down and there is no significant damage to the financial system we can also expect the Fed to follow through in keeping the fund rate elevated. If 06-08 and the mid-90s are any indications, then mortgage rates will stay elevated in the 6% seesawing up and down.
The real estate market could potentially continue to fall as demand continues to be subdued at these elevated prices and high-interest rates. This could be happening as the Fed continues to reduce its balance sheet and the money supply falls. Banks will not be too keen on handing out money for mortgages.
The real estate market is in a very delicate situation. Home prices from the peak are down 6% on average, with some markets out West down 10 to 15%. Inventory is rising (Summer sales were weak and we are going to start the Spring season with higher leftover Winter inventory), and sales pace/volume is down as sellers are giving out concessions and cutting prices with days on market rising. The inventory level for new construction is in even worse shape as months of supply for new construction is at 9 months with 1.7M units still under construction and another 1.3M permitted. Builders aren’t going to just stop on a dime.
To this we will add consumer savings falling, personal debt hitting new records, rates rising again, household formation falling, and wage growth in negative territory. With higher rates, it will be difficult to see mortgage applications rise and the pool of eligible buyers grow. Demand is simply not there and annualized home sales should hover or fall to the low 4M per year if not the high 3M. Supply will outstrip demand even at these low levels (but growing).
The kicker is that in the next few months, covid emergency will end and rules on credit reporting will change, college debt could no longer be in forbearance, and banks won’t have to actively help homeowners with loan modifications and mitigation. 480k mortgages are still in forbearance and the number of 30 and 60-day delinquencies are rising.
Simply put, things aren’t rosy!