The housing market correction takes an unexpected turn

The Federal Reserve has a simple anti-inflation book. It goes like this: keep putting upward pressure on interest rates until business and consumer spending across the economy weakens and inflation subsides.

Historically, the Federal Reserve’s anti-inflation guide has always delivered a particularly hard hit to the US housing market. When it comes to housing transactions, monthly payments are everything. And when mortgage rates go up — which is what happens once the Fed goes after inflation — those payments to new borrowers go up. This explains why, once mortgage rates rose this spring, the housing market slipped into a lull in the housing sector.

But this residential patch may lose out soon some steam.

Over the past week, mortgage rates have fallen rapidly. As of Tuesday, the average 30-year fixed-rate mortgage rate was stable at 5.05%, down from June, when mortgage rates peaked at 6.28%. Falling mortgage rates provide immediate relief to marginal homebuyers. If the borrower takes out a $500,000 mortgage in June at a rate of 6.28%, he or she will pay $3,088 per month in principal and interest. At 5.05% rate, that payment will be just $2,699. Over the course of the 30-year loan, that’s a savings of $140,000.

What’s going on? With the advent of weak economic data, financial markets are widening the recession of 2023. This puts downward pressure on mortgage rates.

“The bond market is pricing in a high probability of a recession next year, and that the economic downturn will cause the Fed to reverse course and cut [Federal Funds] rates,” says Mark Zandi, chief economist at Moody’s Analytics luck.

While the Fed does not set mortgage rates directly, its policies influence how financial markets price both the 10-year Treasury yield and mortgage rates. In anticipation of a higher Fed Funds rate and monetary tightening, financial markets are increasing both the 10-year Treasury yield and mortgage rates. In anticipation of the Fed funds rate cut and monetary easing, financial market prices have both lowered the 10-year Treasury yield and mortgage rates. The latter is what we see now in the financial markets.

With mortgage rates soaring earlier this year, Tens of millions of Americans have lost their eligibility for real estate loans. However, as mortgage rates begin to decline, millions of Americans are regaining access to mortgages. This is why many real estate professionals encourage lower mortgage rates: they should help increase home buying activity.

While lower mortgage rates will undoubtedly push more sideways buyers back into open homes, don’t think about the end of the housing correction just yet.

“The bottom line is that the recent drop in mortgage rates will help margins, but the housing market will remain under pressure with mortgage rates at 5% (lower sales, slower home price growth),” wrote Bill McBride, author of The Economy. Calculated Risk Blog, in its Tuesday newsletter. the reason? Even with mortgage rates down one percentage point, housing affordability is still historically low.

“If we include the increase in home prices, payments increase by more than 50% year-over-year on the same home,” McBride wrote.

There’s another reason real estate speculators shouldn’t be overconfident: If recession fears – which help push mortgage rates down – are true, it could cause further weakness in the sector. If someone is afraid of losing their job, they won’t jump into the housing market.

“While lower rates are themselves positive for housing, this is not the case when they are accompanied by stagnation and a rapid rise in unemployment,” says Zandi. luck.

Where will mortgage rates go from here?

Researchers at Bank of America believe there is a chance the 10-year Treasury yield will fall from 2.7 to 2.0% over the next 12 months. This can bring mortgage rates down to between 4% and 4.5%. (The trajectory of mortgage rates is closely related to the trajectory of the 10-year Treasury.)

But there is a big wild card: the Federal Reserve.

The Fed clearly wants to slow the housing market. The pandemic housing revival – during which home prices rose 42% and housing construction reached a 16-year high – was among the drivers of high inflation. Declining home sales and declining home construction are supposed to provide relief from the housing oversupply in the United States. We’re already seeing it: The collapse in housing is starting to translate into a drop in demand for everything from wood framing to cabinets to windows.

But if mortgage rates fall too quickly, a housing market recovery could spoil the Fed’s fight for inflation. If that happens, the Fed has more than enough monetary “firepower” to put upward pressure back on mortgage rates.

“Whether or not we’re technically in recession, that doesn’t change my analysis. I’m focused on inflation data… And so far, inflation continues to surprise us on the upside, Neil Kashkari, president of the Federal Reserve Bank of Minneapolis, told CNN. BBS on Sunday. “We are committed to lowering inflation. And we’ll do what we need to do.”

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