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.

The Federal Reserve increased their benchmark interest rate by .50%  yesterday.  So, does that mean today mortgage rates are .50% higher.  It does not.  In fact, some lenders interest rates even dropped by 1/8% after the Fed move.  Why is this?

Well, it was no surprise that the Fed was going to raise their rate yesterday.  And most, if not all, experts agreed they would raise it by .50%.  The Fed could have not raised the rate or raised it by any amount they chose to.  However, because they raised the rate by what everyone expected, there was not movement in mortgage rates.  You see, mortgage rates and the bond market had already moved way ahead of what the Fed actually did yesterday.  Rates over the last month have been tricking down, partially due to the fact that reports show that inflation is getting better.  And with inflation tempering, that means the Fed would not have to raise rates so aggressively as they had in the past.  The Fed for the last month has indicated they would only raise their rate .50% because of moderating inflation.  That moved mortgage rates downward over the last month.  And then yesterday there were no surprises.  So no affect on mortgage rates.

Fingers crossed inflation continues to be checked and get under control.  That should mean lower mortgage rates in the future.

Mortgage Interest rates have been super boring for a while.  Ever since November 10th when the last Consumer Price Index (CPI) was released, the bond market has not had much to react to.  That CPI report is the most significant indicator of inflation, and inflation is the driver of bond yields, and thus mortgage rates.   The next CPI comes out this next Tuesday.

Today’s rates are just a little higher than yesterday’s, but only by about 1/8%, depending on the lender and investor.  All of that could change dramatically next week with that CPI report on Tuesday.  Also, the Fed announcement is the next day and that also has the potential to change the markets.

Between now and then mortgage rates aren’t likely to be anywhere other than the low 6.0% range.

“Both consumer homebuying and home-selling sentiment are significantly lower than they were last year, which, in our view, is unsurprising considering mortgage rates have more than doubled and home prices remain elevated,” said Doug Duncan, Fannie Mae Senior Vice President and Chief Economist. “Following eight months of consecutive declines, the HPSI did tick up slightly in November but is essentially unchanged since hitting its all-time low last month. Consumers continue to expect mortgage rates to rise but home prices to decline, a situation that we believe will contribute to a further slowing of home sales in the coming months, as both homebuyers and home-sellers have reason for apprehension. We expect mortgage demand to continue to be curtailed by affordability constraints, while homeowners with significantly lower-than-current mortgage rates may be discouraged from listing their property and potentially taking on a new, much higher mortgage rate.”

Last month we saw rates drop from the low 7%’s to the mid 6%’s.  It happened on a single day and was the record for the most mortgage rates had dropped in one day – about .50% across the board.  Yesterday we saw them drop again, about .25%.  So today you will find lenders quoting a 30 year mortgage rate anywhere from 6.0% to 6.25%, depending on loan size, credit score, etc.  So in about 30 days we have seen rates drop almost a full 1.0%.  That is awesome!!!!!

In case you missed it last week, Thursday November 10 set a record.  On that day we saw the 30 year fixed mortgage interest rate drop on a single day more than it ever had before – about .60%!  That is remarkable!

So far this week those lower rates are holding.  We are even seeing them drop about 1/8% more from yesterday to today.  So the outlook for interest rates is more promising than it has been for quite a while, but it is still dependent on additional economic data for confirmation.  The worse the economy is doing, the better rates should be able to do, as long as inflation continues to moderate.

Since March 2022, we have seen mortgage interest rates rise at the fastest pace in 40 years.  With the 30-year mortgage rate back in March around 3.0% and now at around 7.0%, these higher rates are bringing the mortgage loan and real estate world to its knees.  Why?  It’s all about inflation.  Higher cost of goods and services have caused the Federal Reserve to raise its benchmark rate every meeting this year.

Tomorrow is a BIG day for mortgage rates.  Thursday morning brings the release of the Consumer Price Index (CPI)–an inflation report that has resulted in bigger market movement than any other economic report this year.  If that report indicates inflation is starting to get under control, we could see a nice downward move for mortgage rates.  If the report says inflation is still a beast to be battled, mortgage rates could go even higher.

So buckle up and watch the fireworks Thursday morning!  It’s gonna be a bumpy ride!!!!!!!!!!

“The Fed raised rates today, what are mortgage rates doing?”

This is a common question I receive from friends and clients.  And because the Federal Reserve has increased their policy rate this year much more than in years past, this question is being asked more frequently.

To answer this, first let’s define the “Fed Rate”.  In short,  it is the interest rate that banks charge each other to borrow or lend excess reserves overnight.  All banks are required to keep a certain portion of cash (reserves) in proportion to their deposits.  Banks don’t want this money sitting and earning nothing, so banks with excess cash will lend it to another bank that needs cash, and the Fed Rate is what they charge each other.

So does the Fed Rate affect mortgage rates?  Directly no.  The Fed Rate is not a mortgage rate.  Mortgage Interest Rates are determined by what is happening in the stock and bond market, and the stock and bond market are affected by what is happening in the economy.  Thus, economic factors like unemployment and inflation affect mortgage interest rates.  When inflation is high, you will see mortgage rates increase and vice versa.  High inflation is driving mortgage rates higher right now.  To combat inflation, the Fed has increased their policy rate to slow down the economy.  It is all related, but not directly.

If we want mortgage rates to go back down, we need inflation to get in check.  To get inflation in check, we need gas prices to go back down.  We need people back to work to open up the flow of goods and supply chains.  It will happen, but it might take some time.

With interest rates around 7.0% for a 30 year fixed mortgage, it is no surprise that total mortgage application volume is lower.  Borrowers are not going to refinance their current mortgage with these higher rates, and new borrowers either don’t want to buy now and lock in a high rate, or can’t afford the payment with the higher rate.

“Mortgage Rates increased for the 10th consecutive week, with the 30-year fixed rate reaching 7.16 percent, the highest rate since 2001. The ongoing trend of rising mortgage rates continues to depress mortgage application activity, which remained at its slowest pace since 1997,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Refinance applications were essentially unchanged, but purchase applications declined 2 percent to the slowest pace since 2015 – over 40 percent behind last year’s pace.”

What does the future hold?  What will rates and our housing market do going forward?  The Mortgage Bankers Association’s (MBA) economic forecast for the coming year was released this week.  They believe both economic and housing market weakness will continue into 2023 and will “drive a 3% decline in purchase originations and a decline of 24% in refinance applications.”

The most recent report from the Federal Housing Finance Agency (FHFA) shows that from July to August 2022 prices fell just under 1.0%.  So are home prices declining, yes.  And it is anticipated they will continue to do so for the rest of this year and probaby through the winter months.

However, it is worth noting that year over year numbers are showing homes are way up.  From August 2021 to August 2022 the same report shows that homes are up 12.0%.  It is going to take a long time for homes prices to come back down to anything close to pre-Covid numbers.  And most experts agree they never will.