According to the Mortgage Bankers Association, total mortgage applications for last week hit a 25 year low.  High Interest rates, high prices, inflation concerns, lower consumer confidence all played a part in fewer people applying for home loans.  Also adding to the low number was the hurricane in Florida.  Obviously fewer people in Florida are buying homes if they are in the path of the destruction.

A statement from Joel Kan, the Mortgage Banker’s Association Associate Vice President of Economic and Industry Forecasting:

“Applications for both purchase and refinances declined last week as mortgage interest rates continued to increase to multi-year highs following more aggressive policy measures from the Federal Reserve to bring down inflation.  Additionally, ongoing uncertainty about the impact of the Fed’s reduction of its MBS and Treasury holdings is adding to the volatility in mortgage rates. The 30-year fixed rate was 6.52 percent, its highest level since mid-2008. After a brief pause in July, mortgage rates have increased more than a percentage point over the past six weeks.”

“With rates now more than double what they were a year ago, the pace of refinancing is running at a 22-year low and last week was more than 80 percent below last year’s level. Similarly, purchase activity was 29 percent lower than a year ago, with higher rates and economic uncertainty weighing on buyers’ decisions.  With the recent jump in rates, the ARM share reached 10 percent of applications and almost 20 percent of dollar volume. ARM loans remain a viable option for qualified borrowers in this rising rate environment,”

Mortgage Interest rates have been only going up the last 30 days.  Rates started climbing back in March, and the 30 year rate slowly rose to 6.0% in July.  August gave us a break and it went back to around 5.0%  As of mid-day yesterday it hit 7.0%, which is officially a 20 year high.

Perhaps it should be “unofficial,” because the daily rate records only go back to the beginning of 2009.  Rates got close to this back in 2008, and maybe even a few lenders hit 7.0%.  But the average 30 year rate across the board is now 7.0%.

How does this affect the housing market?  How does this affect Joe Homebuyer?  The payment on a new $400k mortgage is up at least $1000/month since March. That is significant and will bring the housing market to a screeching halt!

Why have rates spiked so quickly?  The obvious assumption is what the Fed has done.  Hiking their benchmark rate so much and so often this year.  But that’s actually not the entire story, or even the largest factor.

The issue comes from what is going on in the bond market in The UK.  That’s an odd thing to consider when it comes to mortgage rates in the United States, but it is important to understand just how huge the market reaction to recent events in The UK has been.  Without going into great detail, what’s important to note is the British 10yr yields have risen more than 1.00% in four business days.

Bonds here have to compete with bonds there and raise yields.  Mortgage Backed Securities compete with 10 year bonds, and also have to rise accordingly.

The Fed has also indicated they are not going to stop raising their benchmark rate until they see a significant decrease in inflation in the US.  So no help from them is on the horizon.  What does this mean for us?  It means 7.0 or close to it is the new 30yr fixed rate reality for now.

Mortgage Interest Rates go up and down when the bond market goes up and down.  A lot has been happening in the bond market this year, as they are analyzing record high inflation and a recessionary economy.  This week has been sideways, not a lot of movement.   But mid June was the worst of it while late July was the best.  And consequently there was more than a full percentage point of difference between those two time frames for 30 year fixed rate mortgages.

As of late last week, most lenders had adjusted their rates close to the highest peaks we saw back in mid June.

There is still a lot of volatility ahead.  When deciding to lock or float, good luck.  No matter what any experts do to predict it, they have a 50/50 chance of being right, and wrong.

Last week was not pleasant if you were hoping for mortgage rates to fall or at least hold steady.  After seeing rates hit a peak on July 8th, we had seen a nice trend downward the rest of July.  Mortgage Rates even fell to just under 5.0% at the end of July.  However, a slow rise in rates started in August and last week rates are now back in the mid 5.0% range.

If there’s relief in sight for rates, it will depend on economic data and inflation readings in the coming weeks.  The market and the Fed both seem to be expecting a some moderation in the inflation data, so calmer inflation won’t really help until it has established a track record with several months of substantial declines.  At the same time, the market has been surprisingly willing to be spooked by higher inflation data–as was the case this past week.

Weaker economic data has helped rates at times in the past 2 months, but weak housing data doesn’t really count because weakness is widely expected when rates have risen as much as they have.  There have also been just as many surprisingly strong economic reports–several of them contributing to the rising rate trend seen so far in August.

In the bigger picture, August’s rising rate trend is basically returning rates back to a more sideways range that we saw in May.  Incidentally, rates are now right back around the same levels they were in May, after going down lower and higher.  Without a major change for better or worse in the economic data, we can expect rates to continue bouncing around in this range until the data is looking consistently stronger or weaker.

The number of applications for residential mortgages went down for the fourth consecutive period during the week ended July 22 according to the Weekly Mortgage Applications Survey produced by the Mortgage Bankers Association (MBA).  This brings new applications to the lowest they have been since February 2020.  Remember February 2020?  This was the month right before the Covid shutdown, and it was March 2020 that interest rates dropped like rocks and the refinance and purchase boom began.  So, are we right back to normal?  Or is this the indication of even more slowing?  Time will tell…………

The economic factor that hits mortgage rates the worst is inflation.  Inflation has been going crazy this year, and thus mortgage rates have been going significantly higher.  This week the economic data shows inflation is cooling somewhat and mortgage rates are reacting accordingly, going down.  Finally!

Other good things have been happening here in the US and in the world, so rates were already leveling off and dropping a little.  This inflation data gave rates a nice push downward.

Rates got as high as 6.25% in some areas.  Right now, on average, you will find mortgage rates around 5.625%-5.875% for a best-case-scenario conventional 30yr fixed rate.  Of course many things affect a rate someone gets, such as credit score, loan to value, and the type of mortgage (purchase versus cash out refinance).  But this is the average.

 

May 2022 is the first time since before March 2020 that total home sales in a month have returned to pre-pandemic numbers.  That is significant.  Before the pandemic began in March 2020, house sales were about 5.4 million per month.  During March, April and May of 2020, those numbers dropped to almost zero as panic set in.  But then the huge drop in interest rates spurred homebuyers and the buying frenzy began.  Home sales jumped to as high as 6.6 million per month.  It has stayed that way for the last 2 years.  But now we are seeing sales coming back to where they were.

Will this slow the home appreciation?  Maybe.  Higher interest rates are definitely pricing some people out of the market, especially young buyers and first time home buyers.  It is those young first time buyers that spur all house sales – someone wanting to sell their smaller home and upgrade need a first time buyer to buy that home so they can buy their next home.  However, inventory remains low.  Basic economics says if supply is low and demand is high, prices rise.  In this case, maybe house prices will not rise much more, but it might keep them from coming down.

Between Friday and Today mortgage rates have jumped a solid 1.0%.  From about 5.0% to 6.0% in two days.  Have mortgage rates done this before.  Yes, they have.  In March 2020 in response to the lock down of the COVID-19 pandemic we saw similar volatility.  But these types of wild swings higher or lower are very rare.

Why are rates going bonkers?  The one word answer is inflation.  Friday a report was released stating the inflation problem in the United States and the world is worse than expected.  The bond market hates inflation.  And mortgage rates follow the bond market.  The easy equation is higher inflation = higher mortgage rates.

The Federal Reserve and their monetary policy is the only answer we have to combat inflation.  The Fed speaks on Wednesday, and right now we don’t know what they will do.  When there is uncertainty in the air, any bad news is compounded by that uncertainty.  These two ingredients are the recipe for the higher mortgage rates today.

From the middle of 2019 through early 2021, housing inventory declined increasingly fast.  The worst decline occurred in early 2021 when year to year inventory fell a whopping 55% due to unrelenting Covid-19-induced demand. Since then, the declines have steadily shrunk, to -30% in January 2022, to zero in early May and now up 11% year to year, the first year to year rise three years! That said, inventory is still 50% below its pre-pandemic level. It should keep rising.