I write this twice yearly as many clients ask my opinion on where things are and where they are going regarding mortgages. Top line: The sky isn’t falling!
The most significant impact on mortgage rates: inflation and the government selling mortgage-backed securities. The bond market hates inflation, and mortgage rates follow the bond market closely. If bond traders see rates increase, they won’t buy lower coupon bonds. The Fed sets the overnight borrowing rate by large institutions (called the Fed Funds Rate). Though that’s the opposite of a 30-year-fixed note to a consumer, the Fed still sets policy direction for the entire market. Their stated goal is to get inflation below 2%, which has proven quite stubborn as prices that consumers and suppliers pay continue to rise. Next, the Fed bought billions in mortgage-backed securities from the mortgage crisis, the Great Recession and COVID-19. That was called Quantitative Easing. That pushed rates into the 3% range. Well, they are now selling those securities, which is also putting pressure on rates as there are a lot of bond sellers with fewer buyers.
Rates: Generally, home buyers under 45 years old haven’t seen rates at current levels. Most folks buy their first house in their late 20s, so buyers in their early 40s and younger haven’t seen rates over 5%! We’re around 7% for a 30-year fixed, which is quite a shock to them. That’s about the 50-year average. My anecdotal feelings are that home buyers have finally accepted the current rate environment as transactions increase. Where are they headed? Earlier this year, the Mortgage Bankers Association predicted rates back into the upper 5% range in early 2024, but they have moved that out.
Real Estate Values: I’ve told buyers to turn off the news. Real estate is highly localized, so what’s happening in Austin may not occur in California, the Midwest, or even Houston. Austin prices have stabilized, and there is a housing shortage, especially for affordable housing. Though the area has seen some job cuts in high-tech, most places are hiring. Samsung, Tesla, and Apple continue to build here, and people continue to move here. Many prospective buyers insist that prices will decrease, so they re-up their leases as they wait for next year.
So, what will happen? If rates decline next year and the economy recovers, house prices will increase. There is a considerable housing shortage due to the vast population of people under 40 needing homes: their first or move-ups for growing families. Supply and demand: low supply + high demand = increased prices. Remember: you can always refinance should rates drop. Alternatively, the actual lost cost of borrowing is waiting. Connect with me today with any questions you or your clients have.
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