ECONOMISTS STUMPED: SOARING RATES LEAVE HOUSING LEADERS FRUSTRATED

TODAY'S HOT NEWS

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Economists are scratching their heads, and housing industry leaders are venting their frustrations as mortgage rates continue a relentless climb to new heights not seen in more than 2 decades!

Rates on 30-year fixed-rate conforming loans hit a new 2023 high of 7.59 percent Tuesday, the highest they've been in over twenty years. National Association of Realtors Chief Economist Lawrence Yun vented his frustration with Fed policymakers, who have telegraphed their intention to implement at least one more rate hike this year.

“The Fed is overdoing the rate hike,” Yun said in a LinkedIn post Wednesday. “The economy is measurably slowing. Even the lagging indicator job gains are coming in light.”

Yun said he’s worried that rising interest rates could actually fuel inflation as would-be homebuyers throw in the towel, fueling more demand for rentals, and making housing more scarce as builders balk at paying higher rates on construction loans. So he's of the opinion that the Fed's strategy of increasing interest rates to curb inflation, could actually stimulate a higher rate of inflation! 

Mortgage applications continue their slide - applications for purchase loans were down a seasonally adjusted 6 percent last week when compared to the week before, and 22 percent from a year ago. That's the lowest level of activity since 1995 - more evidence of what has become a stagnant market, with buyers and potential sellers sitting on their hands, playing a wait-and-see game...

For most of this year, there was a nice spread between adjustable rate mortgages and the 30-year fixed rate, so I was urging buyers to take a good look at locking in an ARM, and then doing a refi down the road. That strategy no longer makes sense as the spread is now down to about 10 basis points - 7.49 vs 7.59, so not worth it.

And jumbo mortgages, those over $726,200, which used to be a screaming good deal, have gotten hammered recently. At this time last year, rates on jumbo mortgages were about half a percentage point less than for conforming loans. Now the situation has reversed, with the “spread” between jumbo mortgages and conforming loans widening to nearly 40 basis points on Wednesday. And with the average price in Boca about $1.5M, that's hitting a lot of buyers, not to mention rate-locked potential sellers, very hard.
 

So where are rates headed next?

Futures markets tracked by the Chicago Merc FedWatch Tool put the probability of one or more additional Fed rate hikes this year at 37 percent, but see a one-in-five chance (19.6 percent) that the Fed will bring rates back down below current levels by March before the spring homebuying season kicks off. Not a very rosy outlook, but it is what it is.