Happy Monday! We are past April fools, so no jokes today! Lots of information:
Interest Rates
Fed’s 10-Year Treasury and Mortgage Rate Behavior
Housing Inventory
New Construction
Why Buying Now Makes Sense
Seller’s Market
Interest Rates
In response to high inflation, the Fed continues to hike rates. While the fed rate does NOT directly affect mortgage rates, it does affect how the market responds. The market can directly affect the 10 Year US Treasury Yield, which DOES have a strong correlation to mortgage rates.
Are rates going to continue climbing or is the mortgage rate peak in our rearview mirror? I personally think rates are about to head down. Here’s why.
10-Year Treasury & Mortgage Rate Behavior
Traditionally, there is an average spread of about 1.7% between the 10-year Treasury Yield (BLUE) and the 30-year Fixed Mortgage Rate (GREEN). The mortgage rate is typically higher than the treasury yield as well.
That is not happening. In fact, the spread is about 2.7% a whole point higher. This makes mortgage rates higher than usual, by nearly one full point. As of the beginning of March 2023, the spread was up to 3%.
Forbes states that this is due to housing market fear and volatility.
“The option for homeowners to refinance their mortgages makes mortgage-backed securities an inferior investment option. So investors will buy them only if they offer a premium over treasury bond interest rates. That is the wholesale mortgage spread.” Forbes, March 14, 2023. This is partly why mortgage rates aren't falling or behaving with as strong of a correlation to 10 Year US Treasury Yield as historical figures present.
I expect the 10 Year US Treasury Yield to continue cooling off to the point of being consistently lower than the 30-year fixed mortgage rate. As that trend strengthens, we can expect the rates to follow suit. How will this affect housing inventory?
Housing Inventory
Thankfully, the number of homes for sale is on the rise. However, according to realtor.com, the number of homes listed is still 47.4% lower than pre-pandemic levels (2017- 2019).
If interest rates begin a strong trend downward and housing inventory remains low, do not be surprised if home prices continues to rise. High Demand + Low Inventory = Higher Prices
Low housing inventory won’t likely change anytime soon. So why not build it? I can’t imagine that home builders across America haven’t been trying. For various reasons however, challenges have made it tough for builders to add inventory to the market at levels needed since the housing crisis in 2008/2009. Stack on the recent pandemic-induced supply chain issues and significant supply costs and that certainly doesn’t help.
Most builders are less likely to carry the risk of financing construction due to lessons learned from 2008. Banks are less likely to lend to builders based on the same underwriting requirements that were used prior to 2008.
If you are a builder or you know a builder who is in this dilemma and has the capacity to expand, i.e. double, triple their business, CALL ME. Our one-time close construction financing options only require as low as 5% down from the client. The loan is COMPLETE and the funds are disbursed PRIOR to breaking ground. This eliminates virtually all risk from the builder.
Build now or buy now. It makes sense to move now. Here’s why.
Why it Makes Sense to Buy Now
If you can afford to buy now and it makes sense for you and/or your family at this point of your life, do it. Holding off because of interest rates? Buy the rate down. Date the rate, marry the home. If you don’t like the current interest rates, then buy the home and refinance the home when the interest rates go down.
Rent rates continue to go up. Today’s mortgage rates could be 7% interest. Renting a home is 100% interest.
According to CNBC, owning a home can increase your net worth. This is true. The Federal Reserve states that U.S. homeowners had a median net worth of $255,000, whereas renters only had a net worth of only $6,300.
Since 1991, home values have increased 54.4%. That seems significant until we learned that, according to the FHFA, the pandemic housing explosion increased home values by 258% on average.
We Are Still in a Sellers Market
With inventory levels at record lows, even with higher interest rates, there is an imbalance between supply and demand. And this imbalance favors the seller.
With interest rates being higher than recent pandemic levels, don’t expect bidding wars. However, there is still enough demand for housing for the seller to negotiate more strongly in their favor. Many have gained a lot of equity in their homes over the last few years and may be ready to cash out. According to Matt Ryan Webber with Investopedia, the average mortgage holder has $185,000 in accessible home equity as of August 2022. This is 35% over the equity held in 2021. Selling with the intent to downsize may become more popular for retired folks or those who are nearing retirement or those who are upcoming empty nesters.
With continued demand for housing and no short-term solution to address housing inventory, we can anticipate little change in the housing market.
When considering the steady rise in real estate values, it’s still a good time to buy if you’re in the market.
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Terry Roberts, USMC Veteran | Sr. Loan Officer NMLS 397987 | E Mortgage Capital
With a rich background spanning over a decade in the mortgage and real estate sectors, Terry Roberts has become a cornerstone in guiding over 10,000 clients through the complexities of the home purchasing journey in the United States. His expertise covers a broad spectrum of housing loans including conventional, FHA, VA, and cutting-edge new construction financing options.
Emerging from challenging early life circumstances, including teenage parenthood, dropping out of high school, and facing homelessness, Terry's determination led him to serve in the US Marine Corps. This decision was driven by a commitment to safeguarding freedom and securing a better future for his family. His active duty service in the US Marine Corps, marked by nearly a decade of dedication, instilled in him a profound desire to assist fellow Americans in achieving homeownership, a cornerstone of the American dream that he fiercely believes in.
Terry leverages his profound understanding of the real estate market to empower individuals in their pursuit of property ownership as a strategic investment for wealth generation. His journey from adversity to becoming a beacon of hope and guidance in the real estate domain is not just inspiring but a testament to his commitment to his clients' success.
Connect with Terry Roberts, a proud USMC Veteran and Senior Mortgage Broker (NMLS 397987), for expert guidance on your path to homeownership. Visit www.TerryRoberts.com at E Mortgage Capital, where every client's dream is approached with the respect and dedication it deserves.
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