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Why industry experts don’t expect mortgage rates to fall

Rates have more than doubled in 2022, but don't expect them to stabilize for at least another year, experts say

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Record-high mortgage rates have frozen the housing market, forcing loan officers to find business outside their wheelhouses.

Despite new language in the Federal Open Market Committee statement that suggested a potential slowdown in curbing inflation, Federal Reserve Chairman Jerome Powell maintained a hawkish tone on raising the federal funds rates during Wednesday’s press conference.

And with Fed rates expected to rise even further, industry experts and economists don’t expect mortgage rates to stabilize for at least another year.

“Even with the Federal Reserve raising its short-term fed funds rate by another large amount, longer-term interest rates look to move only slightly,” Lawrence Yun, chief economist at National Association of Realtors, said.

Once inflation is contained, mortgage rates will start to drift lower. It may be another year or two before that happens. 

Lawrence Yun, chief economist at the National Association of Realtors

Mortgage rates, which are currently near a 22-year high, declined slightly from last week ahead of the Fed’s sixth rate hike announcement. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($647,200 or less) decreased to 7.06% on Wednesday from last week’s 7.16%, according to the Mortgage Bankers Association

The Fed’s short-term rate does not directly impact long-term mortgage rates, but it does steer market activity to create higher rates and reduce demand. 

“While the mortgage market has already priced in the latest Fed move, mortgage rates are still at 20-year highs that hurt homebuyers. Once inflation is contained, mortgage rates will start to drift lower. It may be another year or two before that happens,” Yun said.

The fresh language in the policy statement noted that the Fed is considering the “cumulative” impact of its hikes so far when determining future rate increases. Still, Powell presented a different tone in his press conference, indicating that thoughts of a potential pause would be premature.

“Bond yields fell after the Fed made their statements about raising rates and then shot back up after Jay Powell talked about higher rates for longer,” said Logan Mohtashami, lead analyst at HousingWire. “Tiny movement in bond yields from the start of the day but wild intraday action. Rates can end up slightly higher today if this slightly higher bond yield sticks.”

An occasional slip in mortgage rates is “inexplicable” on an upward trend that began almost a year ago, said Holden Lewis, home and mortgage expert at NerdWallet.

“The Federal Reserve clearly intends to keep raising short-term interest rates, which will raise the floor for mortgage rates,” Lewis said.

“A housing recession is here”

For home shoppers and sellers, mortgage rates have been quick to adjust higher in response to expected Fed moves, said Danielle Hale, chief economist at Realtor.com.

“In the last 12 weeks alone, mortgage rates have soared more than two percentage points, cutting significantly into homebuyer purchasing power and likely causing shoppers to revisit their budgets,” Hale said.

The question is, when will the Fed pivot and indicate a pause, or at least significantly reduce its pace of increases

Marty Green, Principal at Polunsky Beitel Green

Existing home sales declined for the eight consecutive months in September, dropping to 4.71 million units from 6.18 million in September 2021. As of September, the median home price was $384,800 for existing homes of all types, an 8.4% increase year over year compared to September 2021, when the median home price was $355,100, according to the NAR. 

A housing recession is here, Marty Green, principal at Polunsky Beitel Green, emphasized

The swift jump in interest rates have dampened potential homebuyers’ willingness or ability to enter the market, and potential home sellers who are locked in to super low rates are not willing to reduce sales prices materially enough to motivate buyers, according to Green. 

“The question is, when will the Fed pivot and indicate a pause, or at least significantly reduce its pace of increases,” Green said.

Mohtashami also pointed in his recent commentary to a housing recession, citing falling sales, production, jobs and incomes in the housing sector. What the difference is in this “traditional housing recession” from the housing bubble years, is high household balance sheets and no credit stress. 

“They (Fed) know housing is in recession already, but they don’t care because they don’t see a credit bust or a job loss recession yet,” Mohtashami said. 

Goldman Sachs expects that the FOMC is leaning toward slowing the pace of tightening to 50 bps in December.

The good news is sellers who are more realistic will try to beat the market.

Mitch Burns, a real estate agent with Engel & Völkers

Roger Ferguson, former vice chairman of the board of governors of the U.S. Federal Reserve System, believes the Fed will raise interest rates by 50 bps next month, along with two 25 bps hikes at the start of 2023. 

Tables have turned for some sellers 

With mortgage rates more than doubling this year, and with rates expected to climb further in the coming months, sellers are becoming more realistic. Buyers, on the other hand, are more in tune with higher mortgage rates and have more leverage in the market, loan originators and real estate echoed.

“It is no longer a seller’s market,” said Nick Smith, founder at Rice Park Capital Management. “Days on market for homes that are sold, number of homes receiving multiple offers, mortgage applications, and actual home sales – they have all moved in a negative direction.”

“The good news is, sellers who are more realistic will try to beat the market,” Mitch Burns, license partner at real estate advisor at Engel & Völkers, said. “After 30 days, if the seller had not had an offer after maybe 10 showings, we’ll make an adjustment to drop the price.”

This translates to borrowers’ increased negotiating power, which they did not have when rates were in the low 3% levels at the start of the year.

If a home has been on the market for over a month, borrowers get quite a bit more flexibility, said Todd Davidson, LO at UMortgage.

“Sellers are willing to chip in for a 2-1 buydown or lower price or accept offers contingent on the sale,” Davidson said.

In a higher rate environment, buyers are increasingly opting for 2-1 or 1-0 rate buydowns to reduce their monthly mortgage payment. With the buydown, the borrower pays a lower rate during the first year or two, and after that, the full rate is paid for the remainder of the loan term.

While low housing inventory and sluggish new home construction still remain a challenge in the housing market, buyers are better positioned to negotiate contracts with contingencies, Davidson added.

“Six months ago, if someone would’ve given a contingent offer, they would’ve gotten laughed at,” Davidson said. “But now if a home is sitting on the market for 10 days, people are accustomed to homes selling so quickly (that) realtors and sellers would get a little nervous.”

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