Now what?

In our last newsletter, we discussed the Federal Reserve Bank’s (FED) response to the COVID-19 pandemic. In March of 2020, the Federal Reserve (FED) committed to purchasing unlimited amounts of Mortgage Backed Securities (MBS) to prop up the economy which had been reeling from the effects of COVID-19. The result was mortgage interest rates that plummeted to the lowest in American history.  This fueled the fire of an already raging housing market, as affordability massively increased thanks to the near-zero rates.

Just a quick reminder: These articles I share here are researched and written by me! As part of my commitment to ongoing support for my clients and partners, I write these articles to help them understand what’s really happening in the markets, beyond the headlines and soundbites.

In September of 2022, the FED stopped its purchase of MBS, and what happened next was entirely predictable.

Their value plummeted, and in turn, mortgage rates increased sharply. And of course, as mortgage interest rates increased, so too did the monthly cost of borrowing. And with that, the boom in home affordability (despite increasing prices) evaporated as the low-rate party came to a screeching halt. In fact, in just a few short months, the cost to borrow $100,000 increased by over $200. The sudden and steep increase interest rates meant that buyers who couldn’t win bids when rates were lower were forced to reduce their budget – and many potential buyers left the market completely, frustrated and dejected.

Mortgage interest rates went through a period of wild instability after the FED stopped its purchase of MBS, though we have enjoyed a period of relative stability since late 2022. At the time of writing, the national average interest rate for a 30 year fixed mortgage is 6.95%. In our local markets, competition among potential buyers remains strong. Clearly, higher rates have pushed some buyers out of the market, but high levels of competition show that buyers are less sensitive to rates. What we have seen, though, is that during these periods of mortgage rate instability potential buyers lose their enthusiasm. In other words, volatility in the interest rate market seems to slow down the housing market more than higher rates themselves.

However, we’re not out of the woods just yet. Consider the millions of people who refinanced during the low-rate boom: Can they be persuaded to move from their homes & give up a ~3% rate, only to buy a new home in a competitive market, and get a new mortgage at 6%+? Even for those considering downsizing, the higher mortgage rates could mean the payment on their new, smaller home is as much as (or more than) their larger home that they’re considering selling. This “homeowner rate lockdown” idea could put further downward pressure on inventory, exacerbating the primary challenge facing the housing market today.

Time (and most importantly, data) will tell what the future holds for the housing market. If the trend of waning price inflation continues, the FED may be inclined to slow down or stop their rate hikes. But if the labor market continues to remain stubbornly strong, the FED may continue to keep the pressure on the economy, as it seems convinced that higher unemployment is required to slow inflation. Regardless of what happens in the financial markets, though, the underlying challenge of low inventory will persist in the housing market.

If you found this interesting or helpful, please feel free to share it with a friend, family member, or co-worker – it’s my goal to educate and empower as many people as possible during this incredibly unique time in housing!

Here is how I can help!

• If you are looking to purchase a new home or have questions about the market, getting preapproved, general mortgage questions, etc., or
• If you are a Realtor or a Broker looking for a lender with great financing solutions to help educate your clients on the state of the market to help them feel good about their decisions,

Please call today – I am happy to help however I can!