Tag: Mortgage Rates

Realtors Forecast 6% Mortgage Rates in 2025, Boosting Housing Market Optimism

Posted on by slightbourne@noblecapitalmarkets.com
Key Points
– National Association of Realtors forecasts a 6% average for 30-year fixed-rate mortgages in 2025, boosting housing affordability and demand.
– Housing starts projected at 1.45 million, with single-family units leading growth.
– Median existing home price expected to rise to $410,700, with a 2% annual increase in house prices.

The National Association of Realtors (NAR) has forecasted that the average U.S. 30-year fixed-rate mortgage will drop to around 6% in 2025, bringing much-needed relief to homebuyers and potentially reviving a sluggish housing market. This rate decrease is expected to make homeownership more accessible for many prospective buyers, helping to stimulate both new housing construction and sales of previously owned homes.

According to the NAR’s latest projections, the housing market will see about 4.5 million existing home sales in 2025, a slight improvement over current levels. House prices are anticipated to rise by approximately 2%, with the median price for an existing home reaching $410,700. This price increase aligns with the general trend in the market, but the forecasted decline in mortgage rates could provide relief to homebuyers struggling with affordability challenges.

In particular, the NAR’s prediction that mortgage rates will stabilize around 6% offers hope to those shut out of the market due to the higher rates seen in recent years. With the current mortgage rate hovering near 7%, many prospective homebuyers have been unable to afford median-priced homes. If rates do indeed fall to 6%, approximately 6.2 million households will be able to afford homes at the median price, giving a much-needed boost to the housing market. This is a stark contrast to the present situation where higher rates have made it difficult for many to qualify for loans, especially first-time buyers.

Over the past few years, the housing market has been affected by the Federal Reserve’s aggressive monetary policy tightening, which increased borrowing costs and led to a slowdown in home sales. Additionally, the so-called “rate-lock” effect has worsened the supply crunch. Many homeowners with mortgage rates below 5% have been reluctant to list their homes for sale, fearing they won’t be able to find a similarly low rate on a new home. As a result, the market has faced limited inventory, which has driven up home prices and further strained affordability.

To address the lack of available homes, builders have focused on constructing smaller homes, which have appealed to buyers seeking more affordable options. This has led to an increase in new home sales, which are expected to continue rising in 2025, with the NAR projecting 1.45 million housing starts, the bulk of them for single-family units. These new homes could provide much-needed inventory, helping to ease the supply issues that have plagued the market.

Despite the positive outlook for 2025, challenges remain. While mortgage rates are expected to decline, they are still relatively high compared to historical norms, and inventory levels are unlikely to return to pre-pandemic levels anytime soon. This ongoing supply shortage will continue to place upward pressure on prices, making homeownership more difficult for some buyers. Additionally, the affordability gap between different regions will continue to vary, with some markets remaining out of reach for many potential buyers.

Nonetheless, the prospect of lower mortgage rates has sparked optimism in the housing market. A stabilizing rate at 6% could provide the necessary boost to allow more buyers to enter the market, driving both demand for existing homes and new construction. This change would also give homebuilders more confidence to move forward with projects, further stimulating the economy.

The ongoing reduction in mortgage rates, alongside a resilient economy, could help buyers overcome affordability barriers, especially in more moderately priced markets. As 2025 approaches, all eyes will be on mortgage rates and the broader housing market to see if these predictions hold true and bring about a much-needed shift toward recovery.

U.S. Existing Home Sales Hit 14-Year Low in September as Buyers Wait for Lower Rates

Posted on by slightbourne@noblecapitalmarkets.com
Key Points:
– Home sales dropped by 1.0% in September to the lowest level since 2010.
– Housing inventory rose 1.5%, but prices remained elevated, increasing 3% year-over-year.
– First-time homebuyers made up only 26% of sales, below the 40% needed for a robust market.

U.S. existing home sales fell to their lowest level in 14 years in September, reflecting ongoing challenges in the housing market as buyers continued to hold out for lower mortgage rates. According to the National Association of Realtors (NAR), home sales dropped 1.0% last month, bringing the seasonally adjusted annual rate to 3.84 million units, the lowest figure since October 2010. The decline surprised economists, who had forecasted no change at 3.86 million units.

The year-on-year picture was equally bleak, with sales down 3.5% from September 2023, marking a continuing trend of sluggish demand following the spike in mortgage rates earlier this year. While rates briefly dropped after the Federal Reserve’s recent decision to cut interest rates, they have climbed again over the last three weeks, fueled by strong economic data that has led traders to scale back expectations of further rate cuts next month.

The NAR speculated that the upcoming U.S. presidential election on November 5 might also be contributing to buyer hesitancy, although there is no hard evidence supporting this claim. “Some consumers may be delaying a major financial decision like purchasing a home until after the election,” noted Lawrence Yun, NAR’s chief economist. He added, however, that market conditions—such as more available inventory, lower mortgage rates compared to last year, and job gains—remain favorable for buyers who choose to act now.

Despite the increase in housing supply, prices have not dropped as some buyers had hoped. The median existing home price rose 3.0% year-over-year to $404,500 in September, with home prices increasing across all regions of the country. Housing inventory climbed 1.5% to 1.39 million units, the highest level since October 2020, providing buyers with more options, though still not enough to significantly lower prices.

At the current pace of sales, it would take 4.3 months to exhaust the existing supply of homes, up from 3.4 months a year ago. A balanced market typically has a supply range of four to seven months, so while the increase in inventory is welcome, it has yet to shift the balance enough to bring prices down.

First-time homebuyers continue to struggle in this market, making up only 26% of transactions, a slight drop from 27% last year. This is well below the 40% share that economists and realtors say is necessary for a healthy housing market. Many first-time buyers are being priced out due to high home prices and elevated borrowing costs.

Additionally, 30% of transactions in September were all-cash sales, up from 29% a year ago, as wealthier buyers and investors continue to dominate the market. Distressed sales, including foreclosures, made up just 2% of total transactions, similar to last year’s figures, indicating that most homeowners are not under extreme financial pressure to sell.

As the housing market continues to face uncertainty around mortgage rates and economic conditions, prospective buyers remain cautious. With elevated prices, and only modest improvements in supply, it is unclear when the market might see a full recovery in sales activity.

Mortgage Refinance Boom Takes Hold as Weekly Demand Surges 20%

Posted on by slightbourne@noblecapitalmarkets.com
Key Points:
– Refinancing applications surged 20% in one week amid declining mortgage rates.
– Mortgage rates fell to 6.13%, the lowest in two years, driving demand.
– The refinance share of mortgage applications reached 55.7% of total demand.

Mortgage refinance activity has seen a significant surge as homeowners across the United States rush to take advantage of falling interest rates. According to the Mortgage Bankers Association (MBA), applications to refinance home loans soared by 20% last week compared to the previous week, driven by the continuous decline in mortgage rates. This marks a stunning 175% increase in refinance demand from the same time last year.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($766,550 or less) dropped to 6.13% from 6.15%. Though the change may seem small, the cumulative effect of eight straight weeks of declining rates is pushing homeowners to seize the opportunity for potential savings. Joel Kan, vice president and deputy chief economist at MBA, highlighted this ongoing trend: “The 30-year fixed rate decreased for the eighth straight week to 6.13%, while the FHA rate decreased to 5.99%, breaking the psychologically important 6% level.”

Refinance applications now make up 55.7% of all mortgage applications, showcasing how appealing the current rates are for homeowners. However, while the percentage rise is significant, the overall level of refinancing activity remains modest when compared to previous refinancing waves. The ongoing economic environment, combined with seasonal slowdowns in homebuying, has contributed to this pattern.

Despite the seasonal slowdown, mortgage applications to purchase homes rose just 1% over the last week, demonstrating that homebuyers are still facing challenges like high home prices and limited inventory. These factors have kept the pace of new home purchases relatively stable, with purchase applications only 2% higher than the same week last year.

One interesting takeaway from the latest data is that average loan sizes for both refinancing and home purchases have reached record highs. The overall average loan size hit $413,100 last week, the largest in the survey’s history. This reflects both the continued rise in home values and the larger loan amounts that homeowners are seeking, particularly in high-cost markets.

Looking ahead, mortgage rates have not seen significant movement at the start of this week. However, they may react as more pressing economic data, such as jobs reports and inflation numbers, are released in the coming weeks. Any developments in the broader economic outlook could influence the future path of mortgage rates, either stabilizing them or prompting further fluctuations.

For now, homeowners who have yet to take advantage of the current low rates are eyeing the market closely, as more savings could be realized with additional rate cuts. With mortgage rates remaining near their lowest levels in two years, the refinancing boom may continue to gain traction, especially if the Federal Reserve implements further rate cuts to counter slowing economic growth.

Housing Market Shakeup: Mortgage Rates Plummet as Fed Signals Potential Rate Cuts

Posted on by slightbourne@noblecapitalmarkets.com
Key Points:
– 30-year fixed mortgage rates drop to 15-month low
– Federal Reserve hints at possible rate cuts starting September
– Refinancing applications surge, but home purchases remain sluggish

The U.S. housing market is experiencing a significant shift as mortgage rates tumble to their lowest levels in over a year, offering a glimmer of hope for both potential homebuyers and current homeowners looking to refinance. This dramatic change comes on the heels of signals from the Federal Reserve about potential interest rate cuts and weakening job market data.

According to the Mortgage Bankers Association (MBA), the average contract rate on a 30-year fixed-rate mortgage plunged by 27 basis points to 6.55% in the week ending August 2, 2024. This marks the lowest rate since May 2023 and represents the sharpest drop in two years. The sudden decline in mortgage rates can be attributed to two primary factors: the Federal Reserve’s indication of possible rate cuts beginning in September and a noticeable slowdown in the job market.

The Federal Reserve, which had previously maintained an aggressive stance on inflation by keeping interest rates high, has now hinted at a potential policy shift. This change in direction comes as a response to cooling price pressures and a decelerating labor market. The possibility of rate cuts as early as next month has sent ripples through financial markets, affecting everything from stocks to Treasury yields.

Adding fuel to the fire, the Labor Department’s July jobs report revealed a jump in the unemployment rate to 4.3% and a slowdown in hiring. These indicators have sparked concerns about an imminent recession, leading to a temporary slide in equities and a rally in U.S. Treasuries. The resulting drop in Treasury yields has had a direct impact on mortgage rates, creating a potential opportunity for millions of American households.

The sudden drop in mortgage rates has had an immediate effect on refinancing applications, which have surged to their highest level in two years. Homeowners who purchased properties when rates were at their peak – around 7.9% last October – now have the chance to refinance and potentially lower their monthly payments significantly.

However, the impact on home purchases has been less dramatic. Despite the more favorable borrowing conditions, purchase activity only edged up by less than 1%. This muted response can be attributed to the persistent issue of low housing inventory, which continues to drive up home prices and offset the benefits of lower interest rates for many potential buyers.

The current situation presents a mixed bag for the housing market. On one hand, lower mortgage rates offer relief to those who have been priced out of the market in recent years due to the combination of rising home prices and high borrowing costs. On the other hand, the underlying economic concerns that have led to this rate drop – particularly the weakening job market – could potentially dampen consumer confidence and willingness to make major purchases like homes.

As the market adapts to these new conditions, real estate professionals, lenders, and policymakers will be closely monitoring how these changes affect housing affordability, inventory levels, and overall market dynamics. The coming months will be crucial in determining whether this drop in mortgage rates will be enough to stimulate a broader recovery in the housing market or if other economic factors will continue to pose challenges.

In conclusion, while the plummeting mortgage rates offer a ray of hope for many Americans, the housing market’s response remains to be seen. As economic uncertainties persist, potential homebuyers and homeowners alike will need to carefully weigh their options in this rapidly evolving landscape.

U.S. Housing Market Shifts Gears: June Sales Slump Signals Transition to Buyer’s Market

Posted on by slightbourne@noblecapitalmarkets.com
Key Points:
– Existing home sales dropped 5.4% in June, indicating a market slowdown
– Housing inventory increased by 23.4% year-over-year, yet prices continue to rise
– Market shows signs of transitioning from a seller’s to a buyer’s market

The U.S. housing market is showing signs of a significant shift, as June’s home sales data points to a cooling market and a potential transition favoring buyers. According to the latest report from the National Association of Realtors (NAR), sales of previously owned homes declined by 5.4% in June compared to May, reaching an annualized rate of 3.89 million units. This marks the slowest sales pace since December and represents a 5.4% decrease from June of the previous year.

The slowdown in sales can be largely attributed to the spike in mortgage rates, which surpassed 7% in April and May. Although rates have slightly retreated to the high 6% range, the impact on buyer behavior is evident. Lawrence Yun, chief economist for the NAR, noted, “We’re seeing a slow shift from a seller’s market to a buyer’s market.”

One of the most significant changes in the market is the substantial increase in housing inventory. The number of available homes jumped 23.4% year-over-year to 1.32 million units at the end of June. While this represents a considerable improvement from the record lows seen recently, it still only amounts to a 4.1-month supply, falling short of the six-month supply typically considered balanced between buyers and sellers.

The surge in inventory is partly due to homes remaining on the market for longer periods. The average time a home spent on the market increased to 22 days, up from 18 days a year ago. This extended selling time, coupled with buyers’ increasing insistence on home inspections and appraisals, further indicates a shift in market dynamics.

Interestingly, despite the increased supply and slower sales, home prices continue to climb. The median price of an existing home sold in June reached $426,900, marking a 4.1% increase year-over-year and setting an all-time high for the second consecutive month. However, this price growth is not uniform across all segments of the market.

The higher end of the market, particularly homes priced over $1 million, was the only category experiencing sales gains compared to the previous year. In contrast, the most significant drop in sales occurred in the $250,000 and lower range. This disparity highlights the ongoing affordability challenges in the housing market, especially for first-time buyers and those seeking lower-priced homes.

The changing market conditions are also influencing buyer behavior. Cash purchases increased to 28% of sales, up from 26% a year ago, while investor activity slightly decreased to 16% of sales from 18% the previous year. These trends suggest that well-funded buyers are still active in the market, potentially taking advantage of the increased inventory and longer selling times.

Looking ahead, the market’s trajectory remains uncertain. Yun suggests that if inventory continues to increase, one of two scenarios could unfold: either home sales will rise, or prices may start to decrease if demand doesn’t keep pace with supply. The influx of smaller and lower-priced listings, as noted by Danielle Hale, chief economist for Realtor.com, could help moderate overall price growth and potentially improve affordability for some buyers.

As the housing market navigates this transition, both buyers and sellers will need to adjust their strategies. Buyers may find more options and negotiating power, while sellers may need to be more flexible on pricing and terms. The coming months will be crucial in determining whether this shift towards a buyer’s market solidifies or if other factors, such as potential changes in mortgage rates or economic conditions, alter the market’s trajectory once again.

Homebuyers Face Ongoing Affordability Challenges Despite Slight Mortgage Rate Dip

Posted on by slightbourne@noblecapitalmarkets.com

The mortgage market has seen a slight reprieve this week, with average rates on a 30-year fixed mortgage dipping just below 7%. According to Freddie Mac, the average rate has decreased to 6.95% from 6.99% the previous week. However, for many prospective homebuyers, this minor drop may not be enough to make a significant difference in affordability.

Freddie Mac’s report on Thursday highlights a small but noteworthy dip in mortgage rates. A separate measure tracking daily averages by Mortgage News Daily shows fluctuations between 6.97% and 7.17% over the past week. Despite this slight decline, the rates remain relatively high compared to historical lows, creating challenges for budget-conscious homebuyers.

The Federal Reserve’s policies continue to play a crucial role in shaping mortgage rates. Recently, the Fed decided to hold the benchmark rates steady at 5.25% to 5.50%, signaling only one rate cut for the rest of the year. This decision suggests that any substantial decline in mortgage rates is unlikely in the near future. The Fed’s cautious approach indicates that significant rate drops might not occur until well into 2025.

A recent study indicates that a majority of homebuyers, particularly first-time buyers, need significantly lower rates before they feel confident returning to the market. Ralph McLaughlin, Realtor.com’s senior economist, emphasizes that for inventory-constrained buyers, current mortgage trends will likely maintain the “mortgage rate lock-in effect.” This effect, where homeowners are reluctant to sell and buy new homes at higher rates, is expected to persist until at least the end of the year.

The latest inflation data has shown signs of moderation, with the core Consumer Price Index (CPI) excluding food and energy costs, climbing just 0.2% monthly in May—the lowest since last June. Overall inflation has decelerated year-over-year compared to April. While this news initially caused a dip in mortgage rates, the Fed’s subsequent announcement to hold rates steady tempered this effect. The Fed now projects one rate cut for the rest of the year, a reduction from previous expectations.

Fannie Mae’s homebuyer sentiment survey from May reveals that only one in four Americans expect mortgage rates to decrease over the next 12 months. In contrast, more than 30% of respondents anticipate that rates will rise. This sentiment has led to a new low in consumer confidence, driven by the overall lack of purchase affordability.

Despite current challenges, there is a glimmer of hope on the horizon for homebuyers. Economists at Bank of America Global Research predict multiple rate cuts over the next 24 months—four in 2025 and two in 2026. These cuts, in increments of 25 basis points, could bring rates down to between 3.50% and 3.75% by 2026. This long-term outlook provides a potential path to more affordable mortgage rates, but significant declines in the short term remain unlikely.

Last week saw a brief surge in mortgage application volume, increasing by 16% according to the Mortgage Bankers Association. This surge was primarily driven by a short-lived drop in daily rates, which hovered near 7%. New mortgage applications increased by 9%, though they remain 12% lower than the same week last year. Refinancing activity also saw a notable increase of 28% week-over-week, particularly among VA borrowers who took advantage of the lower rates.

At the current average rate of 6.95%, a homebuyer would pay approximately $1,600 monthly on a $300,000 home with a 20% down payment, according to the Yahoo Finance mortgage calculator. This cost highlights the ongoing challenge of affordability for many potential buyers.

While the slight dip in mortgage rates below 7% offers a small reprieve for homebuyers, significant declines are still months away. The Federal Reserve’s cautious approach, coupled with persistent inflation concerns, suggests that substantial rate reductions are unlikely until 2025. Homebuyers must navigate these challenges with careful planning and realistic expectations, while keeping an eye on long-term trends that may eventually bring relief.

Yellen Sounds Alarm on “Impossible” Housing Market for First-Time Buyers

Posted on by slightbourne@noblecapitalmarkets.com

For investors looking at hot housing sectors, Treasury Secretary Janet Yellen just aired some cold hard truths about the brutal landscape facing first-time homebuyers. In testimony before the House Ways and Means Committee, the former Federal Reserve chair minced no words in declaring it “almost impossible” for those trying to get that coveted first rung on the property ladder.

“With house prices having gone up and now with much higher interest and mortgage rates, it’s almost impossible for first-time buyers,” Yellen bluntly stated, citing the twin pains of home price appreciation and elevated financing costs.

Her candid assessment encapsulates the scorching environment scorching the dreams of millions of aspiring homeowners. After a pandemic-driven housing boom, the headwinds buffeting the entry-level market show no signs of abating:

Prices at Nosebleed Heights
According to Zillow data, a staggering 550 U.S. cities now have median home values topping the once-unthinkable $1 million mark. California accounts for nearly 40% of those cities, with the Los Angeles and San Francisco areas ground zero for pricing outliers.

Mortgage Rates Kryptonite
The days of locking in a 30-year mortgage under 3% now seem quaint relics. As the Fed jacked rates higher to tame inflation, average mortgage rates soared past 7% as of early 2024 – more than double pandemic-era levels. For cash-strapped first-timers, that translates into over $600 extra in monthly payments for a $400,000 loan.

Inventory Drought
Perhaps the biggest obstacle is critically low supply pipelines thanks to existing homeowners being financially “locked-in” to their low mortgage rates, as Yellen described it. They are disincentivized from listing and moving to avoid securing a new mortgage at higher rates – leading to a self-perpetuating cycle.

Rapacious Investor Competition
Even affordable starter homes in short supply are being ravenously consumed by investors. A Redfin report showed they purchased over 1 in 4 U.S. homes in Q4 2023 alone. With hedge funds and private equity firms devoting massive capital to residential real estate, it’s perhaps the biggest pricing pressure of all.

Yellen herself acknowledged the troubling dynamic, stating “We know that affordable housing and starter homes are an area where we really need to do a lot to increase availability.”

So what is being done to combat the brutal affordability crisis freezing out so many first-time buyers? The Biden administration has floated a novel twin tax credit concept:

  • A $10,000 credit for first-time homebuyers could provide vital funds for larger down payments to offset higher rates.
  • A separate $10,000 credit incentivizing existing owners to sell their “starter home” when upsizing could modestly relieve inventory shortages.

Some lawmakers are taking a more forceful approach – moving to punish corporate real estate investors gobbling up residential properties. Proposals include revoking depreciation and mortgage interest deductions, penalty taxes, and even mandates to divest rental home portfolios over time.

Whether such measures gain traction remains to be seen. But there’s no denying the current state of housing markets represents something close to a perfect storm for strivers trying to get in the game.

As an investor, the opportunities are evident amid the obstacles:

  • A generational housing shortage should keep upward pressure on asset pricing
  • Financing challenges and inventory scarcity create huge pent-up demand tailwinds for homebuilders
  • Solutions like single-family rental operators may temporarily ease entry-level pressures
  • And any public-private innovations that help reignite first-time buyer demand could be lucrative portfolio additions

Because for now – as Janet Yellen so starkly articulated – breaking into the housing market as a newcomer is indeed “almost impossible” based on today’s towering barriers. Sometimes the frank truth is the first step towards meaningful investment opportunities.

New Home Sales Rebound: A Boost for Small Caps and Economic Outlook

Posted on by slightbourne@noblecapitalmarkets.com

In the realm of economic indicators, few metrics capture the pulse of consumer sentiment and economic vitality quite like new home sales. The recent surge in new home sales in the United States, hitting a six-month high in March, is a beacon of hope amidst a backdrop of economic uncertainties. This uptick not only signifies resilience in the housing sector but also holds implications for small-cap investors and the broader macroeconomic landscape.

The Commerce Department’s latest report delivered a bullish narrative, showcasing an impressive 8.8% increase in new home sales, with a seasonally adjusted annual rate soaring to 693,000 units. This surge, attributed partly to the persistent shortage of previously owned homes on the market, underscores the robust demand for housing despite challenges such as escalating mortgage rates.

For small-cap investors, this uptick in new home sales is more than just a statistical blip—it’s a promising indicator of consumer confidence and economic buoyancy. Strong housing demand typically translates into a flurry of economic activity, benefiting small-cap companies operating in sectors ranging from home construction and building materials to home improvement and real estate services.

However, amid the celebratory numbers lies a cautionary tale. The accompanying rise in the median house price, coupled with the upward trajectory of mortgage rates, paints a nuanced picture. While higher home prices can fuel revenues for homebuilders and related industries, concerns about affordability may cast a shadow on overall housing market growth, impacting small caps tethered to this sector.

Zooming out to the macroeconomic panorama, the implications of these housing market dynamics are far-reaching. A robust housing sector is not just about building and selling homes; it’s a linchpin of economic stability, contributing significantly to GDP growth, job creation, and wealth accumulation.

Economists and savvy investors are keeping a keen eye on how these developments unfold in the coming months. The recent uptick in mortgage rates, coupled with a slight dip in mortgage applications, hints at potential headwinds for new home sales. This cautious sentiment underscores the delicate dance between market exuberance and economic prudence.

Regional nuances in new home sales add depth to the narrative. While all four U.S. regions experienced increases in new home sales, sentiments among single-family homebuilders remain cautious. Buyers, in turn, are treading carefully, weighing the impact of rising interest rates on their purchasing power.

For small-cap aficionados navigating this dynamic terrain, a balanced approach is the name of the game. While opportunities may abound in sectors riding the housing market wave, strategic risk management and diversified portfolios are non-negotiables in today’s evolving economic landscape.

In summary, the resurgence in new home sales injects a dose of optimism into the market narrative. However, prudence tempered with opportunism will be the guiding ethos for investors eyeing the small-cap space amid shifting economic tides.

Mortgage Rates Remain Elevated as Inflation Persists

Posted on by slightbourne@noblecapitalmarkets.com

Mortgage rates have climbed over the past year, hovering around 7% for a 30-year fixed rate mortgage. This is significantly higher than the 3% rates seen during the pandemic in 2021. Rates are being pushed higher by several key factors.

Inflation has been the main driver of increased borrowing costs. The consumer price index rose 7.5% in January 2024 compared to a year earlier. While this was down slightly from December, inflation remains stubbornly high. The Federal Reserve has been aggressively raising interest rates to combat inflation. This has directly led to higher mortgage rates.

As the Fed Funds rate has climbed from near zero to around 5%, mortgage rates have followed. Additional Fed rate hikes are expected this year as well, keeping upward pressure on mortgage rates. Though inflation eased slightly in January, it remains well above the Fed’s 2% target. The central bank has signaled they will maintain restrictive monetary policy until inflation is under control. This means mortgage rates are expected to remain elevated in the near term.

Another factor pushing rates higher is the winding down of the Fed’s bond buying program, known as quantitative easing. For the past two years, the Fed purchased Treasury bonds and mortgage-backed securities on a monthly basis. This helped keep rates low by increasing demand. With these purchases stopped, upward pressure builds on rates.

The yield on the 10-year Treasury note also influences mortgage rates. As this yield has climbed from 1.5% to around 4% over the past year, mortgage rates have moved higher as well. Investors demand greater returns on long-term bonds as inflation eats away at fixed income. This in turn pushes mortgage rates higher.

With mortgage rates elevated, the housing market is feeling the effects. Home sales have slowed significantly as higher rates reduce buyer affordability. Prices are also starting to moderate after rapid gains the past two years. Housing inventory is rising while buyer demand falls. This should bring more balance to the housing market after it overheated during the pandemic.

For potential homebuyers, elevated rates make purchasing more expensive. Compared to 3% rates last year, the monthly mortgage payment on a median priced home is around 60% higher at current 7% rates. This prices out many buyers, especially first-time homebuyers. Households looking to move up in home size also face much higher financing costs.

Those able to buy may shift to adjustable rate mortgages (ARMs) to get lower initial rates. But ARMs carry risk as rates can rise substantially after the fixed period. Lower priced homes and smaller mortgages are in greater demand. Refinancing has also dropped off sharply as existing homeowners already locked in historically low rates.

There is hope that mortgage rates could decline later this year if inflation continues easing. However, most experts expect rates to remain above 6% at least through 2024 until inflation is clearly curtailed. This will require the Fed to maintain their aggressive stance. For those able to buy at current rates, refinancing in the future is likely if rates fall. But higher rates look to be the reality for 2024.

Mortgage Rates Hit 23-Year High

Posted on by slightbourne@noblecapitalmarkets.com

Mortgage rates crossed the 7% threshold this past week, as the 30-year fixed rate hit 7.31% according to Freddie Mac data. This marks the highest level for mortgage rates since late 2000.

The implications extend far beyond the housing market alone. The sharp rise in rates stands to impact the stock market, economic growth, and investor sentiment through various channels.

For stock investors, higher mortgage rates pose risks of slower economic growth and falling profits for rate-sensitive sectors. Housing is a major component of GDP, so a pullback in home sales and construction activity would diminish economic output.

Slower home sales also mean less revenue for homebuilders, real estate brokers, mortgage lenders, and home furnishing retailers. With housing accounting for 15-18% of economic activity, associated industries make up a sizable chunk of the stock market.

A housing slowdown would likely hit sectors such as homebuilders, building materials, home improvement retailers, and home furnishing companies the hardest. Financial stocks could also face challenges as mortgage origination and refinancing drop off.

Broader economic weakness resulting from reduced consumer spending power would likely spillover to impact earnings across a wide swath of companies and market sectors. Investors may rotate to more defensive stocks if growth concerns escalate.

Higher rates also signal tightening financial conditions, which historically leads to increased stock market volatility and investor unease. Between inflation cutting into incomes and higher debt servicing costs, consumers have less discretionary income to sustain spending.

Reduced consumer spending has a knock-on effect of slowing economic growth. If rate hikes intended to fight inflation go too far, it raises the specter of an economic contraction or recession down the line.

For bond investors, rising rates eat into prices of existing fixed income securities. Bonds become less attractive compared to newly issued debt paying higher yields. Investors may need to explore options like floating rate bonds and shorter duration to mitigate rate impacts.

Rate-sensitive assets that did well in recent years as rates fell may come under pressure. Real estate, utilities, long-duration bonds, and growth stocks with high valuations are more negatively affected by rising rate environments.

Meanwhile, cash becomes comparatively more attractive as yields on savings accounts and money market funds tick higher. Investors may turn to cash while awaiting clarity on inflation and rates.

The Fed has emphasized its commitment to bringing inflation down even as growth takes a hit. That points to further rate hikes ahead, meaning mortgage rates likely have room to climb higher still.

Whether the Fed can orchestrate a soft landing remains to be seen. But until rate hikes moderate, investors should brace for market volatility and economic uncertainty.

Rising mortgage rates provide yet another reason for investors to ensure their portfolios are properly diversified. Maintaining some allocation to defensive stocks and income plays can help smooth out risk during periods of higher volatility.

While outlooks call for slower growth, staying invested with a long-term perspective is typically better than market timing. Patience and prudent risk management will be virtues for investors in navigating markets in the year ahead.