The correction in the housing market will be deep and ugly

Do you think things are bad in the real estate market now? Stick around and see if mortgage rates rise in the 7% range.

If that happens, the current $ 2.2 trillion origin forecast in 2023 will look awfully rosy. Even the most battle-tested industry players are gearing up for one of the strongest housing market corrections in decades.

Federal Reserve President Jerome Powell sent a clear message at a press conference following the announcement of the central bank’s decision to raise the federal funds rate by 75 basis points on Wednesday: the ongoing correction in the housing market, which resulted in the largest mortgage rate hike in four decades is far from an end.

Mortgage-backed securities are just the worst place on the duration spectrum for this move. Freddie’s weekly survey today is hopelessly low: 30-year fixed effective rates are now well over 6.5%.

Matt Graham, CEO of MBS Live

“Builders have a hard time finding lots, workers and materials,” Powell said. “In the long run, what we need is the alignment of supply and demand, so that house prices rise at a more reasonable pace and people can afford houses. Probably, the housing market needs a correction to get to that point. “

So far, monetary policy tightening has brought the 30-year fixed mortgage rate to 6.29% this week, up 27 basis points from the previous week. that of Freddie Mac The Primary Mortgage Market Survey (PMMS) was shown on Thursday. A year ago at this time, rates were on average 2.86%.

“The housing market continues to face headwinds as mortgage rates rise again this week after the 10-year Treasury yield jumped to its highest level since 2011,” Freddie Mac chief economist Sam Khater said in a statement. “Under the influence of higher rates, house prices are softening and home sales have fallen. However, the number of homes for sale remains well below normal levels. ”

Some market watchers were hoping to see Powell express a willingness to soften the tightening. According to Matt Graham, founder and CEO of Matt Graham, founder and CEO of MB live.

“But the biggest benefit to the mortgage industry is that Powell has remained completely unwavering in his commitment to raise rates as needed to tackle inflation,” Graham said. “Between yesterday afternoon and today, the entire financial market is in the throes of adapting to that new reality. Mortgage-backed securities are just the worst place on the duration spectrum for this move. Freddie’s weekly poll today is hopelessly low: 30-year fixed effective rates are well over 6.5% now. ”

My guess is that traditional lenders will most likely be charging points for staying in the high 6 or pushing into the 7 hour.

Blake Bianchi, CEO of Future Mortgage

Where did the “fix” lead us?

The Freddie Mac Index only collects mortgage purchase rates reported by lenders over the past three days. Other estimates, however, show that the rates are even higher.

On Thursday afternoon, the 30-year fixed mortgage rate was 6.62%, up 20 basis points from the previous day. Mortgage news every day reported.

according to bankrate.comAccording to surveys of the 10 largest banks, primary mortgage rates are currently around 6.4%. Rates have risen more than 300 basis points year-over-year, the largest increase in 12 months since the early 1980s, investment banking firm analysts Keefe, Bruyette & Woods he wrote in a report Wednesday.

“This creates a very challenging environment for volume-sensitive companies such as mortgage originators and securities insurers,” said analysts. “Given the magnitude of the rate change, we believe there could be a downside to current estimates for sector volumes in 2023.”

Fanny MaeThe latest forecast, released this week, predicts total mortgage creation activity at $ 2.44 trillion in 2022 and $ 2.17 trillion in 2023.

Homeowners could be locked up in their existing homes when mortgage rates rise and last year’s 3% rates may not return anytime soon.

Nadia Evangelou, economist at NAR

With rates at this level, the entire mortgage market is 150-200 basis points (or more) out of refinancing money, analysts at KBW said. In addition, purchasing activity has also declined significantly in recent weeks. the Mortgage Bankers Association the buying index is currently 21% below the 2021 levels and 26% below the 2019 levels.

To understand the impact on borrowers, this week’s hike in mortgage rates to 6.29% resulted in a monthly loan payment of $ 400,000 of about $ 2,470, up from $ 1,660 a year ago, according to Nadia Evangelou. , National Association of Real Estate Agents senior economist and director of forecasts, he said in a statement.

“Landlords may be locked up in their existing homes with mortgage rates hike and last year’s 3% rates may not return anytime soon. As the nation suffers from a severe housing shortage, reduced mobility can make the even more limited housing inventory and cause an escalation in house prices. ”

However, the mid-priced home is worth about $ 80,000 more than in 2020 and $ 200,000 more than in 2012. “So having positive equity in your home can alleviate the effects of rising mortgage rates on mobility.”

Where is the real estate market going?

Looking ahead, loan officers have begun to expect mortgage rates at the 7% level, a sign that the correction in the housing market will bring even greater affordability challenges in the year ahead.

A few years with 5-7% interest rates on mortgages will be good for the economy, great for buyers, as demand becomes less insane and more sustainable in the long run

Sean Grapevine, Branch Manager of U Mortgage

“After the Fed hiked rates yesterday, today we see the 10-year Treasury rise to 3.697%. My guess is that traditional lenders will most likely charge points to stay in the high 6 or push into 7 now, “said Blake Bianchi, founder and CEO of Boise brokerage. Future mortgage. “Mortgage brokers like us are most likely in the low to mid-range in a prime residence.”

Bianchi said that in the current landscape, tariff shopping has become more critical than ever, as saving half a percent or not paying points can have a financial impact on shoppers in this market. “The good news is we see it’s lowering prices, so buyers can get into a home at a better price and less competition and hopefully refinance later to improve their lending situation,” he said.

Sean Grapevine, branch manager of Mutual Atlanta-based, said Wednesday’s Fed decision has pushed rates up 50-75 basis points in the past two weeks, which isn’t all bad for the housing market.

“The Fed’s rate hike causes temporary pain as people adjust to differences, but a few years with 5-7% mortgage interest rates will be good for the economy, great for buyers, as the demand becomes less insane, and more sustainable in the long run, ”he said.

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