By Douglas Katz – 6/30/2022
Per Freddie Mac:
The rapid rise in mortgage rates has finally paused, largely due to the countervailing forces of high inflation and the increasing possibility of an economic recession. This pause in rate activity should help the housing market rebalance from the breakneck growth of a seller’s market to a more normal pace of home price appreciation.
Some key takeaways:
- This is a pause and not a trend reversal. While this could last for a bit, I recommend assuming that it will not. If you can lock within your deal timeframe, it may make sense. Rates moved unpredictably fast in the last spike and the moves were profound. This is not a great time to gamble, especially if your deal is very tight for debt-service ratios.
- A key gauge for inflation used by the Federal Reserve was higher than goal in May, which may be a sign that there will be additional rate increases ahead. The Fed has been vocal in their focus of managing inflation. I have even seen some chatter about an additional 0.75% increase in the near future and while this does not directly translate the same increase in mortgage rates, it will have an effect.
- Housing inventory increased by 25% year-over-year in June per Realtor.com . While not rate related, this is a good sign for buyers. This could mean that we are nearing an inflection point when actively searching for and bidding on homes becomes less frustrating and manic. We will definitely not be at a normal market any time soon, but this is a good sign. If you are buying, strap on this pads and get back in the game. I recommend to my clients a more casual focused on the house that they really want as opposed to one that they can just find.
- According to The Office of the Comptroller of the Currency, defaults and foreclosure starts are increasing over last year by close to 40%. This was to some degree expected as the tail end of the forbearance pipeline requires resolution. Many of these homeowners are likely “at risk” borrowers whose financial situations had not improved enough for them to pursue a modification earlier. This is why there is likely some correlation between forbearance and foreclosure. While tragic, some of these homes will hot the market and inventory will increase. While this may not be a huge number of homes, it does open an opportunity for shrewd and prepared prospective buyers.
- The bloodbath in the lending market continues as many mortgage companies slash their workforces to meet the new lower demand for loans. By one report, refinance applications were down by 80%. This is cyclical, so it is not a surprise, but it does mark the end of the cycle. Some, like First Guaranty, have even filed for bankruptcy as they could not adapt quick enough. I wrote a recent piece on it if you want to better understand the why and the impact of this.