|Prospective care home buyers are perplexed at today’scompetition to purchase, which will only amplify whenrates drop in the future.|
Mortgage Rate Projections
Many experts forecast mortgage rates to drop into the 5s by year’s end.
This year’s March Madness ended with an unexpected NCAA Championship matchup between San Diego State University (ranked 18th before March Madness) and the University of Connecticut (ranked 10th). Three teams made their first Final Four appearance. Not a single team was ranked #1, #2, or #3. The critical takeaway is that sometimes it is best to expect the unexpected. It does not always play out the way everyone thinks.
This year’s housing market is also playing out much differently than expected. Nobody anticipated buyers bumping into each other with very few available homes (and care homes) to purchase, and bidding wars that result in multiple offers and sales prices above their asking prices. With today’s high mortgage rate environment, values were expected to continue to fall throughout 2023. That is precisely what occurred in the second half of 2022 when mortgage rates continued to soar higher, buyer demand plunged, and the inventory climbed and peaked at its highest level in two years. But that all changed as the inventory plunged to crisis levels.
The high mortgage rate environment affected both supply and demand. Naturally, everyone anticipated that high rates would enormously impact affordability and weaken buyer demand. Yet, very few anticipated that high rates would inhibit so many homeowners from listing their homes for sale. As a result, the inventory has dwindled, and the housing market has heated up substantially since January.
At this point, the lack of home sellers impacts the housing market more than diminished demand, which explains the return of multiple offers and sales prices above the asking prices. Where will the market go from here? It all depends upon mortgage rates. Experts have had a tough time anticipating the direction of rates as it is closely tied to inflation. The trend reveals inflation is slowing falling, but it could take more than a year to reach the Federal Reserve’s 2% core inflation target. To combat inflation, the Federal Reserve increased rates at its fastest pace since 1981. It appeared as if they were poised to continue to increase the Fed Funds rate even higher than anticipated this year until the collapse of Silicon Valley Bank, Signature Bank, and Silver Bank within a week in March. Before the bank failures, mortgage rates were just above 7%. Since then, rates have fallen and bounced between a high of 6.75% on March 21st (according to Mortgage News Daily) and a low of 6.38% on March 24th. They are at 6.44% today. The bank closures and the exposed pressures on banking have changed the outlook for mortgage rates, and many experts are now expecting a U.S. recession between the third and fourth quarters of 2023.
Mortgage rates predictably fall when the economy slows, especially during a recession. Investors look to park their money long-term with safe investments, government bonds, and mortgage-backed securities (bundled home loans). As more and more investors flood these long-term investments, their rate of return drops, and mortgage rates drop. According to the average projection from Fannie Mae, the Mortgage Bankers Association, and the National Association of REALTORS, mortgage rates are anticipated to drop to 6.33% during 2023 Q2, drop further to 6.07% during 2023 Q3, and then drop below 6% to 5.79% during 2023 Q4. While forecasting mortgage rates is exceptionally challenging, one thing is certain: the Federal Reserve has attempted to slam on the economy’s brakes through a series of short-term Federal Funds rate hikes. Eventually, the economy will decelerate further and likely enter a recession, and 30-year mortgage rates will fall.
For a $1 million home with 20% down, the payment was at $5,322 just before the bank failures at the start of March when rates exceeded 7%. It dropped to around $5,057 today, slightly less than 6.5%, a savings of $265 per month, or $3,180 annually. At 6%, the $4,796 monthly payment becomes a monthly savings of $526, or $6,312 per year, compared to 7%. If rates plunge to 5.5%, the payment drops to $4,542, a monthly savings of $780, or $9,360 annually.
As rates drop, affordability will improve, and buyer demand will rise. Stronger demand will heat the market further. Eventually, rates will drop enough to encourage more homeowners to stop “hunkering down” and list their care homes for sale. Rates will need to drop to the mid-5s to unlock more sellers.
The issue is that buyer demand reacts quicker to falling rates than homeowners who need more time to prep their homes for sale. This occurred in 2017 and 2019 and in the post-pandemic world of 2020 and 2021. In each of those years, market times dropped considerably during the last few months of the year. Typically, the housing market slows during the year’s final quarter and does not get hotter.
The window of opportunity to purchase is right now, before rates fall further, igniting demand. While the market may be unexpectedly hot right now, even with high rates, it can grow hotter with even more competition to purchase as rates eventually ease.
Michelle (949) 397- 4506 michelle@RCFEresource.com
Melvyn (949) 500-3630 melvyn@RCFEresource.com