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Mortgage rates declined amid banks failures. What’s next?

The 30-year fixed-rate mortgage was at 6.60% as of March 16, down from 6.73% the previous week

After increasing steadily for over a month, mortgage rates fell last week following a deposit run that provoked a liquidity crisis in regional U.S. financial institutions — and resulted in the failures of Silicon Valley Bank and Signature Bank. But what is there to expect ahead for the housing market? 

Industry observers said that, at least in the short term, mortgage rate declines will support home prices but lead to a better outlook for the spring season.

Freddie Mac’s Primary Mortgage Market Survey showed the 30-year fixed-rate mortgage at 6.60% as of March 16, down 13 basis points from the previous week. According to the survey, the same rate was at 4.16% a year ago.  

“Mortgage rates are down following an increase of more than half a percentage point over five consecutive weeks,” Sam Khater, Freddie Mac’s chief economist, said in a statement. “Turbulence in the financial markets is putting significant downward pressure on rates, which should benefit borrowers in the short term.” 

Other indexes show mortgage rates even lower. At Mortgage News Daily, the 30-year mortgage rate for conventional loans was 6.54% on Thursday afternoon. Rates for jumbo loans (greater than $726,200) were 6.15%. 

And borrowers are taking advantage of lower rates and applying for home loans. The Mortgage Bankers Association (MBA) reported the mortgage composite index, a loan application volume measure, increased 6.5% for the week ending March 10 compared to the prior week. 

Mortgage applications increased for the second consecutive week amid a drop in rates that was brought on, in part, by concerns around the health of several institutions in the banking sector,” Bob Broeksmit, MBA’s president and CEO, said in a statement. 

“Anticipated further rate declines may spur additional application gains as the spring home-buying season begins.” 

The weeks ahead 

Nik Shah, CEO at Home.LLC., explains that mortgage rates are tailing the treasury yields in the short term. Investors flock to safer assets amid fears brought by bank collapses, and the 10-year Treasury note fell from nearly 4% at the start of last week to 3.4% by mid-week. With mortgage rates dropping, “housing affordability is improving and supporting home prices,” Shah said. 

A growing group of monetary policy observers think there’s a chance the Federal Reserve will stop its federal funds rate hikes in the meeting scheduled for March 21-22.

“February’s employment and inflation data both pointed to a still-hot, though slowly cooling, economy. All else being equal, this would likely mean a more aggressive rate hike at next week’s FOMC meeting,” Hannah Jones, economic research analyst at Realtor.com, said in a statement. “However, in light of last week’s bank failures, the committee may choose to remain conservative to ensure stability in the economy.”

Analysts at Goldman Sachs estimate that the stress on smaller banks could result in tightening lending standards, bringing with it an incremental U.S. economy growth drag of 25 to 50 basis points in 2023. (Two mortgage brokers told HousingWire that, so far, mortgage lenders have not tightened lending conditions.)

“Our rule of thumb implies that this incremental tightening in lending standards would have the same impact on growth that roughly 25-50 basis points of rate hikes would have via their impact on market-based financial conditions,” Goldman Sachs analysts wrote. 

The long run 

Shah expects the Federal Reserve to increase rates slowly in the medium term because the job market remains strong. Consequently, home prices will keep declining further. 

“As inflation rose 0.4% month-on-month in February, the Federal Reserve will keep increasing rates, albeit slowly,” Shah said. “Housing contributes to 45% of inflation, a share that has grown for months. So the Fed is keen on demand destruction to cool the housing market down.”

Meanwhile, when rate hikes cease in the long term, demand will rapidly increase, but the housing supply is still near an all-time low. Then, “home prices will skyrocket,” Shah said. 

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