What Goes Up… Must Come Down

What Goes Up… Must Come Down

You may or may not have been alive when these opening lyrics from the song “Spinning Wheel” by Blood, Sweat and Tears was released. It was December of 1968, and the average mortgage rate for a home in the United States averaged roughly 7.5%. Over a decade later in 1981, average home mortgages peaked at an all-time high of 16.63%!

Fast forward to today, on the heels of an aggressive series of rate hikes to counter inflation, the fed, last month, hiked the benchmark interest rate again by .75% points.

But then a curious thing happened.

The following day, mortgage rates turned sharply lower.

The most popular mortgage—the 30-year fixed rate—fell from 5.54% to 5.22%. By Friday, it had dropped to 5.13%. In the days leading up to the Fed announcement, volatility was relatively muted, with rates receding from their mid-June high of 6%.

While this was happening, the Gross Domestic Product report (GDP) was released by the Bureau of Economic Analysis highlighting that the U.S. economy contracted for the second straight quarter, a hallmark of a recession.

The average mortgage rate for a home in the United States is roughly 7.5%

As expected, investors flocked to the bond market for protection, which caused a drop in yields. With mortgage rates fairly tied to 10-year treasury bonds, mortgage rates also dropped—faster than the yield on the risk-free bonds.

While it may seem contradictory, if the markets continue to see a steady stream of economic gloom and doom data, mortgage rates may continue to plunge.

What does this mean for home buyers? Are we entering a “new normal,” which includes levels of volatility within the mortgage space not seen in a prolonged period?

The unpredictability in the mortgage markets has coincided with a cooling off period for home prices. Much talk has been made about the “air coming out of the housing bubble,” but we’re not in a position to be sounding the alarm bells just yet. Even with the average 30-year fixed-rate mortgage finishing around 5.30% in July, down from the June highs of almost 6.10%, new purchases are still tapering off. By the end of June, Morningstar has confirmed that home pricing growth has declined for three straight months.

Mortgage originations are still adjusting from the recent market volatility. For the fourth straight month, rate-lock volume and cash-out refinancings dropped from the prior month and year over year. The decrease in the purchase lock count has dropped to pre-pandemic levels.

The biggest concern is the overall fears of buying a home in a recessionary environment.

The issue of new home buyers isn’t inventory, location, or interest rates. Its affordability.

Affordability is the real issue. With the average purchase price among homes dropping in July by approximately $10,000, this follows a normal trend of loss of buying power, which often occurs in a rising rate environment. Affordability is a real issue, as buyer’s credit scores have also fallen during this time frame.

The song’s name “Spinning Wheel,” sums up this environment in its entirety. Home buyers and those looking to refinance may indeed feel like they’re spinning their wheels trying to wait out the unprecedented series of rate hikes.

It could be worse. They could be playing The Doors’ “The End,” but then again, I’m dating myself. Maybe REM’s “End of the World As We Know It” might resonate better, but it doesn’t inspire a tremendous amount of confidence in the market environment!

 


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