Prices take a break. Will it take? What is the impact on housing construction?
The biggest story yet for the mortgage and housing market in 2021 was the big one top in mortgage rates. It was more abrupt and more ground underfoot than any other than the worst historical examples. That is, it was always will happen when the outlook improves.
For something that “would always happen,” the rate hike still managed to catch a lot of people off guard. The biggest reason for that was the separation between mortgage rates and the bonds that typically determine the movement of mortgage rates.
In fact, there are two types of bonds that affect mortgage rates: government bonds in general and mortgage-backed bonds in particular. In short, the pandemic resulted in one unprecedented collapse in the normal correlations between bonds and interest rates.
The easiest way to think about the split is that the lenders just couldn’t keep up with the demand and higher interest rates helped to slow the situation down. This also boosted profit margins in an uncertain era of profitability due to mortgage relief programs in the CARES act.
From a visual point of view, one of these was created huge blowout with mortgage rates remaining A LOT OF higher than the bond market proposed. We have warned several times that this is only temporary (especially HERE in December), and if reconnecting to the bond market coincided with additional borrowing losses, that would be a pretty nasty one-two blow to mortgage rates. Unfortunately, that’s how things turned out.
Given the size and scale of the rate hike, public awareness has been slow to emerge. That is actually the norm. A big problem on this front is the over-reliance on interest benchmarks like the weekly Freddie Mac survey, which unfortunately is far back Reality when things are moving fast. A large majority of major media outlets use this survey data to report mortgage rate action for the week.
Until last week, the survey-based data had lagged far behind the actual pace of rising rates. This week it looks a little different. We actually had a moderate one Restoration in rates on the first 4 days of the week, while Freddie’s survey data continued to be associated with the sustained surge.
Danger on the assumption that this is some kind of “top” for prices. While this is one possibility, it is also possible that we might just flatten out before interest rates decide where to go next. The story provides a good context for how much soil can be covered in these environments at increasing rates.
It is more than fair to wonder what effect the rise in interest rates is having on the real estate market, but the answer is much more complex than the question. For example we could Take a look at the housing data released this week and conclude that activity has cooled thanks to higher rates.
While previous examples suggest that interest rates have some impact on the buying market, it is almost never so abrupt, and it is never enough to reverse prevailing property trends – at least not by itself.
In the current environment inventory is as much a problem as anything – and probably a bigger problem than prices when it comes to explaining the recent drop in sales. A typical example: Consider the complete lack of inventory in January and February – something that happens with the utmost confidence over the years.
For the coming week, markets will continue to focus on Covid-related statistics, with solid domestic strides somewhat offset by a revival in Europe. Some traders are also waiting to see if spring break leads to a domestic resurgence.
It’s also “end of month / quarter” and that can do it great trade need for big money managers. Some analysts have suggested that these money managers will be big buyers of bonds (which could lead to a rate cut) while others are more focused on fiscal year-end Japan (Japan is a big buyer and, more recently, a big seller of US Treasuries) . something that put upward pressure on interest rates in March).
Either way, the weeks and months ahead promise to settle bets on whether interest rates will take a break from recent drama or continue to hit new longer-term highs. Granted, when long-term highs are still in the “low 3s” it’s hard to be too upset, but all is relative when rates are nearly half a point higher than they were a few weeks ago.