Interest Rate Woes – stay with me to the end (it’s a long one)

The average interest rate on a 30-year, Fixed Rate Mortgage climbed to a 7.09% last week according to Freddie Mac and Fannie Mae placing it at its highest point since 2002.  Keep in mind that this is an average when accounting for the both the highs and lows of this year as well as accounting for all mortgages including lower credit tier borrowers. At the time of this increase we saw an interesting shift of focus from the 2-year Treasury yield back to the normal 10-year Treasury yield which has accounted for much of the volatility seen in the market.

An additional phenomenon in the industry known as an inverted yield curve where long-term interest rates suddenly fall below short-term interest rates has significantly affected ARM (adjustable-rate mortgages) loans causing them to increase drastically as opposed to typically offering lower rates than a Fixe Rate Mortgage. This inverted Treasury yield curve is often an indicator of a recession and has raised many alarms adding increased volatility into the market which in turn accounts for additional spikes in interest rates.

Despite this, forecasts for a recession have almost all turned to predictions of the desired “soft landing” that the FED has been aiming for.  Forecasts for the post-pandemic U.S. almost entirely called for a recession, but now experts are backing off on those predictions.  Sixty-nine percent of economists surveyed by the National Association for Business Economics agree that they see a soft-landing in the future which is a complete reversal from what was seen in March of this year.  So much of the evaluation is data driven that it takes constant scrutiny over time to see the shifts within the market and the economy. Remember that a soft landing is considered a slowdown in economic growth that avoids a recession. Both Bank of America and JPMorgan have changed their outlook from a possible recession to that of a soft-landing. The average American citizen tends to have a different outlook as their focus is very centric and personal and does not contain a full economic or global consideration of factors. Such factors include how strong the U.S. Job market has maintained itself throughout the last 18 months, the time it takes for inflation to subside (generally 12 months or longer) is now being seen and nearing the FED’s target rate of 2%, and unemployment that has stayed persistently low at 3.5% which is barely above the lowest level seen since 1969. Another outlying factor is that mortgage delinquencies are and have been on a serious decline due largely in part to so many who were able to refinance their mortgage into a lower rate or had gained equity over time and were able to both sell and buy a new home and put themselves in a better equity position. Home ownership still remains one of the greatest long-term investments available.

Market predictions continue to show a decrease in volatility and thus a decrease in interest rates as we progress through the end of 2023 and inflation continues to cool. Mortgage Rate projections according to Fannie Mae, MBA, and NAR all show expected rates back into the mid 6% range for quarter 4 of this year and that expectation is well founded. In a highly data driven market, the more data we see, the more comfortable we become. Fannie Mae expects rates averaging around 6.6% throughout Q4 of 2023, while the others are a bit more optimistic, I tend to agree here and expect rates to settle around that point.  This then leads us into 2024 where we can expect continued cooling of inflation, a robust job market, low unemployment, all leading to that desired “soft-landing” and a market that becomes less affected by volatility.

The most common question I get asked – “Why should I buy now? Why not wait until rates come down?” This can seem logical on the outside but when you take an in depth look at the difference in the market now compared to where it will be a year to two years from now, you will see that there is a difference and advantage to buying now. Number 1 and foremost – buying now allows you to buy in a market that is stable as with regards to housing prices while (buying at a lower price) and that interest rate is not permanent.  The reality of the ability to refinance into a much lower interest rate within 12-16 months means you can buy now and set yourself up for future continued success.  Number 2 – as interest rates decline the housing market reacts to this meaning more people enter into the market shopping for a home.  We all saw this during the pandemic with bidding wars, people paying over appraised value, difficulty getting offers accepted.  This will again become the reality once the market turns.  This also causes home prices to inflate meaning the house you buy now will cost you more in 16 months, and that is if you are able to obtain the accepted offer. Even if you are both selling your home and buying a new home, selling it for more does not mean you make more money if you factor in the aspect of buying a home for more money. Everyone is waiting and hoping for interest rates to come down, when they do, the market will flood with buyers. Number 3 – sellers currently are more willing to work with buyers with regards to purchase price (not having to offer significantly higher), seller concessions such as paying a portion of the buyers closing costs, and acceptance of different loan options such as FHA and VA (which were very difficult to get accepted prior).

When discussing all of the factors of the current market with a client I like to remind them of several things: interest rates are temporary and long-term planning is where the difference is made so focus on obtaining the best rate now for your home but make plans to also obtain the best rate down the road when available.  The longer you wait the more costly it can become. Finally, make sure you are speaking with someone that can help you weigh all the options to truly evaluate what your needs are and how to meet them.

Drew Waack

Mortgage Advisor/NMLS# 1573539