Written by Jeff Lazerson
It’s bad timing, for sure, if you’re looking to get on the road to homeownership. You’ll find a meager inventory of homes for sale, largely a list of overpriced crumbs.
Certainly, mortgage rates have dropped nearly a full point since November, but they remain double what they were during the pandemic.
Talk about an affordability punchout.
Sorry to say, it’s going to get worse before it gets better.
Let us count the ways, starting with interest rates.
On Feb. 1, the Fed raised its benchmark rate just a quarter-percentage point, a mere 48 hours before hiring news would ricochet across the markets.
The Labor Department on Feb. 3 reported a 3.4% unemployment rate — its lowest level in nearly 54 years — as employers added 517,000 new jobs . Five days later, Federal Reserve Chairman Jerome Powell had to eat crow following his previous transitory inflation remarks.
“We think we are going to need to do further rate increases,” Powell said. “The labor market is extraordinarily strong.”
To be fair, nobody was expecting the hiring pace to be so red-hot. Job counters were expecting a gain of 106,000.
“The Fed would have raised rates one-half point if the data came out sooner (ahead of the Fed meeting),” said Raymond Sfeir, director of Anderson Center for Economic Research at Chapman University.
The financial markets had already built in a one-quarter percent prime rate increase for both the March and June Fed meetings, projecting the prime rate would land at 8.25%. Now it’s looking more like we’ll see 8.5% this year, perhaps another quarter-raise at the Fed’s September meeting.
Translation: Expect higher interest rates for short-term credit cards, home equity lines of credit and auto loans.
While the 30-year fixed mortgage isn’t directly tied to the prime rate, more rate hikes won’t help in the near term as mortgage markets will be seeking higher yields for investors. Expect mortgage rates to rise over the next several months.
If you can, take an even higher rate now. The tradeoff for a higher rate is either zero points or zero points and zero cost. Plan on knocking your rate way down by refinancing in late 2023.
Powell has been saying for months that job losses will be the roadkill consequential to fighting inflation — getting us back to a 2% inflation rate. What does that do for homebuying confidence, first-timer or not?
Fannie Mae Home Purchase Sentiment Index, a national housing survey, indicated only 17% of respondents in January believed it was a good time to buy.
“For consumers, the same affordability issues are persisting, as they continue to indicate that home prices and high mortgage rates make it a ‘bad time to buy’ a home,” said Doug Duncan, chief economist at Fannie Mae. “Until we see improvements in affordability via lower home prices and mortgage rates, we expect home sales to remain muted in the coming months.”
What else does that portend? A recession.
The Wells Fargo Economics Group released an economic outlook Feb. 8 indicating the likelihood of a mild recession in the second half of 2023.
Charlie Dougherty, director and senior economist with Wells Fargo’s Corporate and Investment Bank cited energy prices, China’s economy opening up after COVID lockdowns and the war in Ukraine as the top of the list of inflationary concerns.
“Balance of risk is tilted to the upside. This could increase inflation risk and could cause (lead to) a more severe recession,” Dougherty said.
Or maybe no recession.
“All the talk about recession is total bull—-,” said Christopher Thornberg, founding partner at Beacon Economics LLC. “There is no material imbalance in the economy. Home prices went up 45% over the last few years. That’s insane. Now prices have to normalize. Why do we have such a tough time saying things are so damn good?”
If, and when a recession hits, you can expect mortgage rates and the prime rate to drop right along with home prices. This is what I call the homebuyer timing pickle. Yes, I think we are in for a recession with mortgage rates starting to fall in the fourth quarter.
“Wealth accumulation is long-term. It’s not to time the market,” said Jordan Levine, chief economist at the California Association of Realtors.
It may be a very long time until the housing market normalizes with respect to a balance of home sellers and homebuyers. Other than life cycle sellers (divorce, death and job relocations, for example), everyone else is staying put.
Mortgage rates around 2%-3% secured during the pandemic, plus low property tax rates tell us so. Right now, first-time buyers can at least get in. They aren’t competing with large down payment and all-cash buyers. Over time, property values always increase. Can you say inflation?
Freddie Mac rate news
The 30-year fixed-rate averaged 6.12%, 3 basis points higher than last week. The 15-year fixed-rate averaged 5.25%, 11 basis points higher than last week.
The Mortgage Bankers Association reported a 7.4% mortgage application increase from last week.
Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $726,200 loan, last year’s payment was $1,072 less than this week’s payment of $4,410.
What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with 1 point: A 30-year FHA at 5.25%; a 15-year conventional at 4.875%; a 30-year conventional at 5.625%; a 15-year conventional high balance at 5.5% ($726,201 to $1,089,300); a 30-year high balance conventional at 5.99%; and a jumbo 30-year fixed at 6.375%.
Note: The 30-year FHA conforming loan is limited to loans of $644,000 in the Inland Empire and $726,200 in LA and Orange counties.
Eye catcher loan program of the week: A 30-year jumbo fixed-rate for the first five years at 5.25% with 1 point cost.
Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or firstname.lastname@example.org.
Shared from OC Register