For the last week we have seen nothing but up for Mortgage Interest Rates.  Not good for the housing market, especially as we enter the prime season of homebuying – spring and summer!!!  How high are they going?  Right now most lenders are quoting rates around 6.625% with some lenders as high as 7.0%.  Dang!  So what is the cause of this slingshot higher of rates?

In general, the market is realizing the possibility the Federal Reserve may have been right in its evaluation for the need to keep rates higher for longer.  Recent economic data has confirmed the economy is stronger than expected.  Consumers are still spending despite the higher cost of spending.  This keeps an upward pressure on inflation – which is the enemy of mortgage rates.  Keep fingers crossed that inflation gets in check!

During the past week the news organizations are alive with reports that there is a “new tax” that gives borrowers with lower credit scores a better interest rate than those with higher credit scores.  This is categorically false.  There are changes.  But in no scenario will a borrower with a 640 credit score get a better mortgage interest rate than a borrower with a 740 credit score.  So what is the truth?

The truth is that Fannie Mae and Freddie Mac did change their fee structure so that borrowers with lower credit scores will get a better mortgage interest rate than under their previous fee structure.  And borrowers with higher credit scores will get a slightly higher interest rate than they did under the previous fee structure.  But the higher credit score borrower will ALWAYS get a better rate than the lower credit score borrower.

Mortgage Interest rates had a great run last week.  Friday was not great, but before Friday, we had reason to cheer and have hope for a great run downward.  At the end of day Thursday, the rate drop was the best weekly drop in rates since back in November, 2022.

Things began to change on Friday last week.  The jobs report was too good – showing the labor force was strong and growing, which is not good keeping inflation in check, and mortgage rates hate anything that causes inflation to rise.  After all, that is what has caused the Fed to raise rates the crazy way they have been doing so since last year.  By yesterday afternoon and this morning, rates are back up and erased those solid gains of last week.

Buckle up for tomorrow.  It is the morning we see the Consumer Price Index (CPI) report.  This is the most important monthly inflation report and can cause mortgage rates to react even more than the jobs report can.

This week began with mortgage interest rates moving higher.  Not drastically, but definitely higher.  For those hoping that the downward movement in rates last week would stick, the markets had other ideas.

Mortgage interest rates are affected by the volatile prices of mortgage backed securities (MBS).  An MBS is essentially a bond that relies on mortgage loans as collateral.  The bond market had been doing very well during the recent banking panic because investors sought safety, pulling money from stocks and putting them in bonds and cash.  MBS and T-bills both were enhanced with cash.

But as the panic has calmed, investors have moved cash out of the bond market and back into stocks.  This has put downward pressure on bond prices and upward pressure on yields and rates.

The Federal Reserve raised its key short-term interest rate by a quarter percentage point today.  The decided to continue their same path, raising the short term rate to try to lower inflation.  This is despite some financial turmoil following the collapse of two investment banks.

Some had thought maybe the Fed would not raise rates today.  However, the Fed did acknowledge the bank collapses should constrain bank lending and weaken the economy and inflation.  “You can think of (the crisis) as being the equivalent of a rate hike and perhaps more than that,” Fed Chair Jerome Powell said at a news conference.  They also insinuated they might only raise rates one more time this year and then pause.  And also hinted that one more rate increase might not happen.

Because of the positive talk by the Fed that inflation seems to be tempering, mortgage rates applauded and responded with moving slightly lower.  Slightly.  This was not a huge downward dive, but hopefully this will continue.  If the economic reports over the next month show inflation continuing to soften, we should see mortgage interest rates also continue to improve.

The Federal Reserve uses its ability to raise and lower the Fed Funds Rate to tighten both financial conditions and lending standards. When they raise that rate, it results in reduced lending and investment, which leads to slowing economic activity, and that usually brings on a recession. The most recent events of two large investment banks failing, financial conditions and lending standards have quickly tightened even more.  So with the Fed meeting today, will they continue to it’s trend of raising the Fed Rate?  Or will they feel that combined with their raising rates over the last year and these recent bank failures the economy is slowing enough to curb inflation?  We will know tomorrow about 2:00 pm ET.

The second and third largest bank failures in history happened over the weekend.  And the markets reacted as you would think they would.  Stocks panicked.  Money moved to bonds.  Mortgage Interest Rates fell significantly.  Anytime bond gain and stocks slide it is good for mortgage rates.  But also the markets were thinking that maybe it’s time for the Fed to relax its aggressive rate hikes.  Everyone is betting on a slower and more moderated rate hike attitude from the Fed in the coming months, and possibly rate CUTS starting later this year.

And today the CPI report came out, and it was in line with expectations.  Still inflation is a problem, but it appears it is tempering.  More hope we are seeing the end of the rate hikes, and a more gentle and softer economy.

The last time 30 year fixed mortgage interest rates were higher than now you would have to go back to November 9th, 2022.  It was economic data yet again that caused rates to go up this week.  Thankfully, it wasn’t data that was very consequential to the United States ecnonomy,  However, there are more important reports and data to be released in the coming weeks.  The Fed has been telling us that rates are highly “data dependent”, so we could see more volatility in the short term.

The average mortgage lender is back in the high 6.0% range with more than a few lenders over 7.0%.

We had a nice respite from higher mortgage rates for a few weeks.  30 year fixed interest rates got as high as 7.25% around the first of November 2022.  Then they slowly started to go down reaching as low as 5.75% the end of January.  Today 30 year fixed rates are around 6.50%.

Why?  Still the same story.  The greatest enemy of mortgage rates is inflation.  And we saw more economic reports last week that suggest inflation is not easing as quickly as the Fed wants it to.  This was a clear indication that the Fed will continue to bump it’s core rate this year, and that scared the markets.  And mortgage interest rates rose quickly.

Fingers crossed that inflation will ease!

Will there be a recession?  What will mortgage rates do this year?  Will house prices go down this year?  So many questions about the economy and with good reason.  2022 was a very unique year in the United States economy and it affected housing and mortgage lending significantly.

First, will there be a recession?  Nobody knows for sure, but most economists are thinking we will have a “soft landing” out of this mess of inflation.  This is primarily because the job market is strong and unemployment is low.  People are working and there are plenty of jobs for those that want to work.  Of course, an unforeseen catastrophic event can change everything, but for now, 2023 should slowly see both inflation and the overall economy get better.

Mortgage rates should go down, ever so slightly, probably landing and staying around 5.50% for a 30 year fixed rate mortgage throughout the year.  This is much better than the 7.25% we hit in the fall of 2022, but not even close to the 3.0% rates we had just one year ago right now.  2022 set a record for the highest increase of rates within a calendar year – never have rates risen so fast in so short a time as they did from March 2022 to October of 2022.  For those of us in the mortgage lending field, it was a crazy time.

Most economists see house prices going down in 2023, but not that much, probably between 5% and 10%.  Of course, some regions where house prices inflated the most might see prices go down more than that, but overall, we are not going to see prices drop like we did in 2008 and 2009.  We are living in a very different economy than back then.  How so?  Well, for one, we won’t see foreclosures like we did back then.  Most homeowners, in fact almost 2 out of 3 homeowners, have an interest rate lower than 4.0%.  And 98% of homeowners have a fixed rate mortgage.  This is drastically different than during the housing crash of 2008 when 2 out of 5 homeowners had an adjustable rate mortgage and 80% of homeowner’s interest rates were higher than 4.0%.  Secondly, homeowners have a ton of equity in their homes.  Because of the fast appreciation we have had in the last 2.5 years, and most homeowners have not tapped that equity like they did before 2008, homeowners are not going to walk away from their homes.  Thus we won’t see gobs of homes come on the market from foreclosures.  This adds to the overall reason we won’t see prices go down much – we have a major shortage of homes on the market.  For 10 years new construction has not met the demand of new homebuyers.  Simply put, there are way more people that want to buy a home than there are available homes to buy.  High Demand and Low Supply always equal higher prices.

So, we shall tread water in 2023 and slowly watch mortgage rates and housing normalize.