Where are Mortgage Rates Going? It depends on how "soft" this landing is or isn't.

Soft Landing or Recession?  Why Is No One Looking at “Under Employment”? And what does it mean for mortgage rates?

Wall Street Investors are betting on a soft landing — a successful effort by the Federal Reserve to pare back inflation without sparking a recession — based on strong economic data and hopes that interest rate cuts are imminent.  So much so that their optimistic outlook helped trigger a huge market rally in the second half of last year, lifting the S&P 500 by 24% in 2023.  We loved seeing our retirement and money market account rebound, but there are still many economic yield signs that point to a ride on the struggle bus.

Here is the biggest economic flare:  The spread between the yields of the 2-year and 10-year US Treasury notes have been inverted since July 2022. When long-term bond yields fall below short-term bond yields it means that investors are more nervous about the immediate future than the longer term. These types of inversions have preceded each of the last 10 recessions. Let me rephrase that.  The market believes that there is more known short-term risk in the market today than there is in the unknown of 10 years from now.  That scares me.

So why are stocks rising as if we are living in a time of over-abundance, when the bond market is marching to high ground as if Tsunami alarms have rung?

Three reasons:

A)   Year over year inflation is easing, but still not yet back at the Federal Reserve’s two-year target. 

Counter Point: For some reason, the Fed and the stock market are stuck looking at year over year inflation, when ‘post-Covid’ inflation prices today are 26.6% higher than what they were in 2020. In that same period, median incomes have risen declined.  The US is also at well over a trillion dollars in credit card debt with rates higher than what we’ve seen since the early 80’s.  Credit Card Default rates are at a 12 year high (as of October 2023, 90-day delinquencies were at 5.08%; or just over 1 in 20 people were more than 90 days behind on a credit card payment).

B)   The unemployment rate is still remarkedly low.

Counter Point: The Fed and the Stock Markets are looking at metrics that were valid in simpler economies.  With ‘Gig Work’ employees and contract employees – an argument could be made that although unemployment isn’t an issue, UNDER-employment is the issue.

C)  Chicken Little and the Economy.  For just about 2 years now, many folks have been stating that a recession is coming and it hasn’t. 

Counter Point: Historically though, there’s a long lag before elevated interest rates take their toll on the economy.  Six out of the past 13 cycles saw the economic impact become most visible between 19 and 28 months after the first Fed hiked rates. That means a recession before the end of 2023 would have been quite early.  If we get to June without deeper signals of a recession, I’ll change my tune – but I do think one is coming.

Based on the above evidence alone, seemingly, the risk of recession is higher today than it was in 2022 or 2023.  And we may need to change the formal markers of a recession to include some sort of “Under-employment” rate based on CPI adjusted household incomes vs. a simple unemployment rate.  The median income in the United States is lower now than what it was pre-Covid, and NO ONE is talking about it.

In short: There’s a lot going on, and any outcome is possible.  And much of how the picture gets painted is based upon which media you read and which candidate for President in November they are rooting for.

What does this all mean for mortgage rates?

Currently, mortgage rates have baked into their pricing that the Fed will lowering the Federal Funds rate at least a few times in the next 12 months.  The Feds won’t do that if there continues to be strong economic news, and if inflation doesn’t retreat further.  If economy remains strong, mortgage rates stay higher.  When the economy feels pain, mortgage rates will fall.  Currently there isn’t enough pain for rates to drop below the mid to upper 6%’s on a conventional loans with a solid credit score and 20% down.

What do rates in the high 6’s mean for the Housing Market?

It no longer means a darn thing.  Home buyers are now ‘institutionalized’ (think Brooks from Shawshank Redemption) to our new normal.  Remorse over the artificially low rates seen during the Covid era are now in the rearview mirror.  I use the analogy to gas prices a lot.  When gas jumped up to $2.99 there was public outrage.  Now when we see $2.99 a gallon we celebrate and get in line to fill up even if our tank is three quarters full.  For the first time in quite some time, this winter, the nation saw more new homes hit the market than we did 12 months prior.  More inventory means more sellers.  More sellers means those sellers are potential buyers.

Anecdotally, our purchase business here at the Ryder Mortgage Group to start of 2024 is the best in quite a few years.  The home buying funk seems to be over.

Have any questions?  Want to nerd out with me on economic news?  I’d love to chat and heart your perspective as well!

* Specific loan program availability and requirements may vary. Please get in touch with your mortgage advisor for more information.

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