Mortgage rates find their range

It feels as if mortgage rates have found a comfortable range to move back-and-forth in, for now. Let’s talk about mortgage rates, how they change, and why I feel as if they’ve “found a range.”

Mortgage rates may change everyday. Sometimes they may change more than once per day. Mortgage rates behave differently then other rates. For example:

• the Federal Funds Rate remains static unless it is changed by the Federal Reserve (and wow, it has changed a lot over the past year).
• Prime Rate moves based on the Federal Funds Rate. It doesn’t change unless the Feds make a move.
• Savings/CD rates typically increase/decrease on the Federal Funds Rate changes too.

From those examples, it is easy to see how the Federal Reserve and their Federal Funds Rates drives a lot of the rates out there (I didn’t even get into credit card and car rates). Mortgage rates move on a daily basis. Their values (up or down) move more like stocks on a day to day basis… some days they go up a bit, then down a bit, and sometimes up and down in the same day.

Mortgage rates move on bond values. As those values change, so do mortgage rates (and as previously stated, change day to day and sometimes more than once a day).

With the knowledge mortgages rates do not behave like other rates and can change often, they usually find a comfortable “range” to float and up and down in until something (economic data, recession, high inflation) moves them out of it.

I feel the mortgage rate range is moving in the low to high 6s… say 6.25-6.75. Why am I making this statement? When mortgage rates went over 7% several months ago, they immediately began to improve. When rates touched a little under 6% not so long ago, they immediately got worse. In both directions, they changed pretty quickly until they feel back into this 6.25-6.75% range and then slowly moved back and forth.

Which puts us… in the 6s for now. If the economy does enter a recession, expect mortgage rates to improve and move under 6%. If inflation jumps back up, expect rates to get into the 7s again. Depending on who you read, there is talk of inflation stagnating/not improving along with many saying a recession is right around the corner. It feels as if a lot can happen in 2023.

So here we are, possibly in the 6.25-6.75% “eye of the economic storm” for 2023.

It’s no longer just about the jobs report

Until recently, all attention about the direction of the economy focused soley on the jobs report. Analysts made predictions and then analyzed where they got things wrong. Then there is the quarterly growth data (GDP). Together with the jobs report, the markets reacted until the next set of numbers were released.

Now we have another focus, and it involves inflation.

Now analysts are obsessing over the inflation numbers. The Consumer (CPI) and Producer (PPI) price reports are “where it is at” with the regard to influencing the stock and bond markets today. We are even reacting to inflation reports from Europe, because the entire world seems to be in a similar situation.

For example, last week, it was announced that the CPI increased by 7.7% annually, with the core number increasing by 6.3% annually. The core excludes the volatile components of food and energy. Overall, these numbers were seen as better than expected and the stocks and bond markets reacted very positively. Though this is only one month of data, it is hoped that this report represents the beginnings of the improvement we have been waiting for (and the reason for my post last month about the Federal Reserve moving too fast/perhaps need to slow down on rate hikes)

Today, market movement is all about inflation and the wide range of data gives analysts and the Fed plenty to chew upon.

Federal Reserve Moving Too Fast?

The Federal Reserve said they’d take inflation seriously. After being a late to react, the Fed declared war and backed up their words with a historic pace of rate increases. While no one wants a recession, the Fed implied they are aware their actions may cause a recession and they are okay with this course of action to get the job done.

Just as the Fed was a little late when they began raising rates, they could be now raising rates too fast. A growing number of analysts are worried that the Fed is moving too far at too fast of a pace. The reasoning for these concerns is that rate increases take time to trickle down to the economy. Some say it takes a few months, others say it takes even longer. Thus far this year the Fed has raised short-term rates by over 3.0%.

Should the Fed slow down? Perhaps they will in December. The inflation numbers leveled off over the summer and dropped in the reports from September. It will be interesting to see the inflation numbers for October and November.

Getting inflation under control is important, but perhaps not having a dramatic rate increase in December could be appropriate. Maybe take a little bit of a breath to see if the over 3.0% of rate increases this year is getting the job done. I’m certainly glad I do not have the job of trying to balance out inflation figures while hoping to not cause a recession.

If the October and November stats show inflationary figures continuing to cool, perhaps take it easy in December and let’s see how things unfold. The Fed can always go back to a big rate increase in late January 2023.

Rents still rising

Rents hit another high over the summer according to a new report from Redfin. The national median asking rent price went up 14% year over year to $2,032. Some good news (if you can call it that) is on a monthly basis, the median rent only inched up 0.6% – the slowest growth since February.

Overall, asking rents have risen more than 30% in some of the 50 largest markets and they will continue to increase in markets with strong job growth and limited housing construction.

Why is the rental market in such a tight squeeze? Well, one of the reasons for the rental market is the same as the purchase market.

Decades worth of under-building have pushed inventory levels near record lows. Yes, the supply of homes for sale increased 27% at the start of September compared with a year ago (per Realtor.com). Yet, active inventory of for-sale homes remained 43% lower than it was in 2019.

The lack of inventory has kept home prices high and out of reach for some buyers struggling to enter the market. “We had a housing shortage before the pandemic” Yun said, “…and then it worsened during the pandemic as people went rampant in terms of purchasing properties.”

Sidelined buyers have had no other choice but to rent. The problem? Rent prices have been skyrocketing as well, as landlords capitalize on the growth in demand. This isn’t the case everywhere in the U.S., but it is cheaper to own that rent in metro Atlanta. The number of buyers out looking is significantly lower than earlier this year. Yes, interest rates are higher. While finding the right home can be hard, refinancing to a lower interest rate in the future isn’t. Rates will lower at some point

Ready to own a home in Georgia? If yes, contact me today (see my banner above for contact info). We can get started in just a few minutes and get you pre-approved for the offer on your new home!

The downside of home appreciation

We’ve all read and heard about sky high home values, homes going under contract way over asking price, buyers waiving any and all contingencies, and all of this primarily fueled by the historically low housing inventory. It’s a great time to be a seller… but what if you are not selling?

A recent study by Knock found the double digit home appreciation pushed homeowner’s equity to record highs along with their tax bills. The dramatic increase of property taxes in 2021 (and more to come in 2022) is hurting those already struggling to make their mortgage payment. Adding an extra $100-$200 per month in property taxes does not help their situation.

In the housing crash, plummeting home values led to a wave of foreclosures. Now we are seeing homeowners unable to make their payments due to an unplanned increases on their property taxes. This did lead to an uptick in foreclosures in 2021.

Not making light of the situation these homeowners face, but most will look to avoid a foreclosure by putting their market on the home for sale. The big difference between now and the housing crash is amount the equity in one’s home.

• No one had equity and everyone was underwater during the housing crash.
• With home values as high as they are now in 2022, we’ll see more homes being listed than foreclosed upon as homeowners get their equity when they sell the home.

Homeowners will not simply walk away from the amount of equity many have now, which will cause a slight increase to the amount of homes listed for sale without a dramatic rise in the number of foreclosures.

Knowing your home’s value is going up and up feels great, but not so great when tax bills begin increasing to reflect the changing market conditions. Add this to everything costing more these days, and it is making life harder on many homeowners (and all Americans) across the country.

Any hope for mortgage rates?

As my colleague recently posted, mortgage rates are off to a rough start this year. As of this post, mortgage rates are a half point higher for the year. I won’t dig into the details of why this is happening. Rodney did a great job of it in his recent post. Today, I’ll focus on what can turn the tide for mortgage rates.

Stocks have suffered a rough start to the new year too. That is normally great news for mortgage rates. Normally as stock prices fall, bond values rise, and mortgage rates improve. The Dow fell over 2,000 points at one moment over the past few weeks, and yet mortgage rates also got worse. If a 2,000 point drop couldn’t help mortgage rates, what can?!?

We must look back at one of the root causes Rodney discussed – inflation. Mortgage rates hate inflation as it eats away at the value of mortgage backed security bonds. As those bond prices fall, mortgage rates rise. The way to help mortgage rates is to combat inflation. The best weapon we have at our disposal is the Federal Funds Rate… the Federal Reserve can continue increasing the Federal Funds Rate. In fact, every time they’ve done that over the past couple of years, mortgage rates have initially improved. Why? The higher the Federal Funds Rate goes, the more it can combat inflation.

Of course, the flip side is raising it too much can cool off the economy (don’t want that). Also, with the new budget deal passed last week by the government, more bonds will be sold to fund the increases to our national budget. More bonds available for sale also lower bond values, pushing mortgage rates higher. As I said in a post late last year, the environment for mortgage rates to get worse is here. That seems to be occurring. While mortgage rates are still low, the time of super low rates could finally be behind us.

The Federal Reserve could increase the Federal Funds Rate to fight inflation and help mortgage rates, but given the other factors at play, the increase to the funds rate may not help improve rates over the long haul for the time being.

If you’ve been sitting on the fence about purchasing a home over the past year because “rates are so low, why hurry,” the time may be now. If you are purchasing in the state of Georgia, contact me. We can get the prequalification process completed in minutes and have you ready to go out and find your new home!

The Feds are halfway there

One of the Federal Reserve presidents recently said the Fed was halfway home to raising rates. Currently, the rate sits at 1.25%, and the statement implies the target is 2.5%. The San Francisco Fed President feels a rate of 2.5% is the normal target rate for the US economy.

If true, what does that mean for rates, economy, etc.?

One interesting aspect would be the ability of the Fed to help when the economy experiences another downturn – and it will. The economy rises and falls, and it will slow down again at some point. Before 2008, the Federal Funds rate sat at 5.25%. The Fed lowered the rate to virtually zero to help the economy. What happens the next time there is a down turn, and the rate sits at 2.5%? There wouldn’t be as much room to lower the rate to stimulate the economy. Of course, no one expects another down turn like 2008 to happen.

What about mortgage rates? Since the Feds began raising the Federal Funds rate, mortgage rates have improved every time. The only reason rates haven’t set new historic lows is due to the rapid rise of mortgage rates after the 2016 election. In fact, was the dropping of the Federal Funds rate that helped pushed mortgages rate lower. Over the past 5 months, mortgage rates have been flat. As they are near historic lows, there really isn’t that much more room for improvement. That said, more rate hikes could help push them lower as an increasing Federal Funds rate can help mortgage rates improve.

In the end, it will probably be more of the same when it comes to rates… staying low. That has been the Fed’s goal since the 2008 market crash. They’ve achieved this goal by buying bonds and then several rounds of quantitative easing. Now that the economy has improved, the Fed’s attention turns to keeping inflation in check. They do this by increasing the Federal Funds rate, which helps mortgage rates improve (mortgage rates hate inflation). The Fed continues their goal to keep mortgage rates low. When will rates go up? Honestly, at this point, I don’t think anyone knows. I’ll believe it when I see it!

Potential Shake Up at the Federal Reserve

Janet Yellen’s days may be numbered. She is the current head of the Federal Reserve, and her role is up for renewal by President Trump. While he has been coy in the past about his plans to (or not to) replace her, signs are pointing to the fact he might indeed do so.

Trump has made no secret about his desire for low interest rates. This tends to fuel stock values/growth (something President Trump enjoys), but it could cause problems down the road. It also marks a significant shift in the philosophies of our major political parties:

• Democrats traditionally want lower rates to encourage job and wage growth.
• Republicans tend to want the Federal Funds rate to be higher to fight off inflation.

There is another angle to consider: Ammunition for the Federal Reserve when there is another economic down turn. Lowering the Federal Funds rate is a classic monetary policy employed by the Federal Reserve to help stimulate the economy in times of slow growth/recession. We saw the Federal Reserve lower the funds rate after the “.com” bubble burst, and then raise it as the economy recovered. This repeated after the housing collapse, and the Feds are now raising the rate again to have this as a fallback position for next time (there will be a next time). If rates are kept low, the Feds won’t have this as an option. Japan have kept their “federal funds” equivalent at zero for many, many years with little impact. They recently started a “negative” rate policy that has also shown little results in getting their economy back on track.

It is a delicate balance, and will be interesting to see how it plays out.

The question that most people reading this blog want to know is how will this impact mortgage rates. Mortgage rates tend to work in opposite fashion to the Federal Funds rate.

• the Federal Funds rate directly impacts rates on second mortgages, car loans, credit cards.
• mortgage rates are determined by the value of mortgage backed security bonds. These bonds (and all bonds) hate inflation. As inflation rises, bond values drop. As bond values go down, mortgage rates go up.

It stands to reason that mortgage rates could improve as the Federal Reserve raises the Federal Funding Rate. That is exactly what has happened as the Fed raised rates. Mortgage rates improved after the Federal Reserve raised rates in December 2015. Mortgage rates skyrocketed after the election (when stock prices went up dramatically). Mortgage rates have improved since the Fed began raising the Federal Funds rate again at the end of 2016 and into 2017 (while stock values have been mostly flat/slightly higher).

It will be fascinating to watch how this unfolds as traditional party philosophies, the economy, monetary policy, and mortgage rates all stand to be impacted by the decision.

A half down. A quarter up.

Hmmm . . . A half down.  A quarter up.

 

A baby’s midnight bottle. 

Or, what you get when the Feds lower rates; mortgage rates go UP. 

The Feds threw a bit of a curve-ball this week after their meeting on Tuesday, announcing to cut the Federal Funding rate and the Discount Rate by 0.5%.  While most economists were anticipating a cut in rates by the Feds, most were leaning towards a more conservative 0.25% cut.  As expected, talk around the water-cooler, advice from well-meaning in-laws and even the front page of yahoo.com is all a-buzz about the good news for mortgage rates and the housing market . . . a half-a percent lower, right!?  Nope.  More like 0.25% higher.

In case you missed last week’s post (and the link in that post to my article on the Feds and the Federal Funding rate), here is the short to medium answer:  the Federal Reserve is charged with helping to control inflation.  Their main tool for doing this is by raising and lowering the Federal Funding rate.  This rate  is the benchmark rate that banks use to borrower money from one another and to lend to customers — mainly on car loans, credit cards and second mortgages.  When the Feds lower the Federal Funding rate, banks lower prime rate (and the LIBOR index will soon follow for all of you soon-to-adjust ARM mortgage holders).  Banks can do business for less; consumers can borrow for less; and the cut in rates  generally helps to spur on the economy.  One the other hand, too much economic growth (and even the potential and/or fear for too much economic growth in the near future) puts pressure on the long-term return on bonds, causing bond prices on mortgages to fall, and as prices fall, the yields go up, and as the yields go up, so do mortgage rates. 

Confused yet? 

Think of it this way.  Suppose I am going to loan you money at a certain rate for 10 years.  Let’s say that I plan on making $30,000 in interest over that 10 years (I’m going to buy a car with my profits — a brand-new model year, super-cool, whatever-car).  BUT, because of inflation, 10 years from now, that $30,000 dollars will no longer be worth the same $30,000 as it is today.  In other words, because of inflation, the $30,000 car that I had my eye on today, (fast-forward ten years) now costs $36,569 (based on 2% inflation per year).  So, now, if I want to make the same profit (enough to buy that new car), I am going to have to charge you a higher rate of interest on that 10 year loan.  If I am worried that inflation is going to increase even higher than the 2%, I’d have to charge you an even higher rate.  The higher the worry (fear of inflation), the higher the rate.   I realize there are some flaws to the analolgy and a car, but (assuming the base price of a new model year car goes up at the rate of inflation) . . . well, hopefully, you get the idea.

So, while the Feds move is nice for the economy — and nice for those home equity lines of credit, credit cards and car loans — the idea of too much of a good thing (too much growth in the economy too fast), has caused mortgage rates to go up.  So where are rates headed from here??  Stay checked-in to “the Mortgage Blog” and I’ll keep you posted.  Like Carnac, I can only tell you what is coming next (rates will be higher tomorrow).  Unfortunately, I can’t see in to the future.  It’s not like I have 1.21 gigawatts of electricity and one of these . . .

 

Jeffrey Pinkerton is a Mortgage Consultant and President of Hillside Lending, LLC and writer for “the Mortgage Blog.”  Hillside Lending seeks to provide mortgage brokerage services with the highest standards of service, care, honesty, integrity and value; concentrating on owner-occupied, residential financing.  For more information about available programs and interest rates, please visit www.hillsidelending.com.