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Our experts answer readers’ home-buying questions and write unbiased product reviews (here’s how we assess mortgages). In some cases, we receive a commission from our partners; however, our opinions are our own.

Mortgage rates increased last week and remain high today. High rates have strained affordability for those who are trying to purchase a home during the peak homebuying season. But some relief may be on the way for those who wait to buy later in the season.

In its latest mortgage forecast, the Mortgage Bankers Association predicted that 30-year mortgage rates will finally drop below 6% by the end of 2023. Looking further ahead, the MBA thinks rates could reach 4.8% by the end of 2024 and 4.5% by the end of 2025.

Today’s Mortgage Rates

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Today’s Refinance Rates

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Mortgage Calculator

Use our free mortgage calculator to see how today’s mortgage rates will affect your monthly and long-term payments.

Mortgage Calculator

$1,161
Your estimated monthly payment

Total paid$418,177
Principal paid$275,520
Interest paid$42,657
  • Paying a 25% higher down payment would save you $8,916.08 on interest charges
  • Lowering the interest rate by 1% would save you $51,562.03
  • Paying an additional $500 each month would reduce the loan length by 146 months

By plugging in different term lengths and interest rates, you’ll see how your monthly payment could change.

Mortgage Rate Projection for 2023

Mortgage rates started ticking up from historic lows in the second half of 2021 and increased over three percentage points in 2022.

But many forecasts expect rates to fall later this year. In their latest forecast, Fannie Mae researchers predicted that 30-year fixed rates will trend down throughout 2023 and 2024.

But whether mortgage rates will drop in 2023 hinges on if the Federal Reserve can get inflation under control.

In the last 12 months, the Consumer Price Index rose by 4.9%. Inflation has continued to slow for several months now, which is a sign that the Fed’s efforts are working.

For homeowners looking to leverage their home’s value to cover a big purchase — such as a home renovation — a home equity line of credit (HELOC) may be a good option while we wait for mortgage rates to ease. Check out some of our best HELOC lenders to start your search for the right loan for you.

A HELOC is a line of credit that lets you borrow against the equity in your home. It works similarly to a credit card in that you borrow what you need rather than getting the full amount you’re borrowing in a lump sum. It also lets you tap into the money you have in your home without replacing your entire mortgage, like you’d do with a cash-out refinance.

Current HELOC rates are relatively low compared to other loan options, including credit cards and personal loans. 

When Will House Prices Come Down?

Home prices declined a bit on a monthly basis late last year, but we aren’t likely to see huge drops this year, even if there’s a recession.

Fannie Mae researchers expect prices to decline 1.2% in 2023, while the Mortgage Bankers Association expects a 0.6% decrease in 2023 and a 1.4% decrease in 2024.

Sky high mortgage rates have pushed many hopeful buyers out of the market, slowing homebuying demand and putting downward pressure on home prices. But rates may start to drop this year, which would remove some of that pressure. The current supply of homes is also historically low, which will likely keep prices from dropping too far.

What Happens to House Prices in a Recession?

House prices usually drop during a recession, but not always. When it does happen, it’s generally because fewer people can afford to purchase homes, and the low demand forces sellers to lower their prices.

How Much Mortgage Can I Afford?

A mortgage calculator can help you determine how much you can afford to borrow. Play around with different home prices and down payment amounts to see how much your monthly payment could be, and think about how that fits in with your overall budget.

Typically, experts recommend spending no more than 28% of your gross monthly income on housing expenses. This means your entire monthly mortgage payment, including taxes and insurance, shouldn’t exceed 28% of your pre-tax monthly income.

The lower your rate, the more you’ll be able to borrow, so shop around and get preapproved with multiple mortgage lenders to see who can offer you the best rate. But remember not to borrow more than what your budget can comfortably handle.

Molly Grace

Mortgage Reporter

Source: businessinsider.com

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To say that today’s housing market is a tough one for first-time home buyers would be an understatement. Not only is housing inventory low, but mortgage rates are elevated at a time when home prices are still pretty high. That’s a very costly combination.

Now, the good news is that today’s first-time buyers aren’t necessarily letting current housing market conditions get them down. Many are still making plans to buy a home this year. But they’re also planning to refinance their mortgages once rates come down. 

In fact, 27% of 2023 buyers are gearing up to refinance after purchasing their homes, according to TD Bank’s First-Time Homebuyer Pulse. But while that’s a good plan in theory, it may not come to pass for quite some time.

Mortgage rates may not fall anytime soon

It’s definitely a good idea to plan to refinance your mortgage loan once borrowing rates drop across the board. And you should especially make an effort to maintain a great credit score so you’re able to qualify for a competitive rate once refinancing your mortgage makes sense.

But if you’re going to buy a home today with the plan to refinance your mortgage as soon as you can, know this — you may be stuck with your current mortgage rate for quite some time. 

Mortgage rates have been stuck in the 6% range for 30-year loans since the start of the year. And based on general market and economic conditions, it’s not unreasonable to assume that mortgage rates could easily stay where they are not just for the remainder of 2023, but also beyond.

More: Check out our picks for the best mortgage lenders

That’s why if you’re going to buy a home today, you’ll need to really crunch the numbers and make sure you can swing your monthly costs based on the mortgage rate you’re locking in initially. If today’s rates make buying a home a stretch, then you may want to put your plans to purchase one on hold. 

Will mortgage rates ever get down to 3% again?

Historically speaking, today’s mortgage rates actually aren’t so high. Rather, it’s that buyers got used to the record low rates that became available earlier in the pandemic. 

In 2021, it was more than feasible to sign a 30-year mortgage at or around 3% if you had great credit. These days, you might be looking at more than double that rate, even if your credit is excellent.

There’s a good chance that mortgage rates will drop over time. But whether we’ll see 3% rates anytime soon is questionable. Those rates aren’t very profitable for lenders, so chances are, we’ll only see them on offer if the housing market takes a dive and lenders grow increasingly desperate to drum up business.

But that said, if you sign a mortgage today in the 6% range and rates drop to the low 5% range or upper 4% range a few years from now, refinancing could result in a world of savings. So while you shouldn’t bank on a refinance to be able to afford your home, you can always pursue a refinance once it makes sense to get a new mortgage.

Source: fool.com

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The data, published on Monday, shows that older vintage mortgages (loans originated before 2010) accounted for under 9% of the total refinanced during the Covid-19 refi boom. This contrasts with nearly a third of mortgages refinanced from 2015 and later vintages. 

As it makes sense to refinance if the balance is higher, less than 10% of the mortgages with balances below $100,000 outstanding as of the first quarter of 2020 were refinanced, compared to half of those with balances between $400,000 and $500,000. 

When broken down by investor type, 38% of U.S. Department of Veteran Affairs mortgages outstanding as of the first quarter of 2020 were refinanced by the end of 2021, compared to 25% of Fannie Mae and Freddie Mac mortgage loans and 22% of Federal Housing Administration mortgages. 

According to the New York Fed researchers, the refi boom will have impacts for decades.

About 64% of the refis were for borrowers to get better rates, which resulted in an average payment reduction of $220. Nine million borrowers refinanced their loans without equity extraction, with an aggregate decrease of $24 billion annually. 

In addition, five million borrowers extracted $430 billion of home equity through cash-out refis. The average amount cashed out was $82,000, and the average monthly payment increased by $150. 

“The mortgage refinancing boom is over, but its impact will be seen for decades to come,” Andrew Haughwout, director of Household and Public Policy Research at the New York Fed, said in a statement. 

“As a result of significant equity drawdowns, mortgage borrowers reduced their annual payments by tens of billions of dollars, providing additional funding for spending or pay downs in other debt categories,” Haughwout added.   

According to the researchers, the 2020-2021 refi boom differed from the refi booms in 2003 and 2013 for three reasons: Interest rates were historically low; home equity was at an all-time high leading to the pandemic; and the rebound in rates was historically steep.

In fact, when the market turned, the 30-year mortgage rates rose by 400 basis points, climbing from a historically low rate of 2.68% in December 2020 to 6.90% in October 2022. Such an increase had not been seen since early 1980, per Freddie Mac’s estimates. 

And, the mortgage market is still recovering.

The New York Fed’s Center for Microeconomic Data shows in its Quarterly Report on Household Debt and Credit that mortgage originations – measured as appearances of new mortgages on consumer credit reports – dropped in Q1 2023 to $324 billion. 

That’s the lowest level seen since Q2 2014, which was an unusually low quarter due to the “taper tantrum.”

Meanwhile, the pace of equity extraction halted when mortgage rates began climbing. Quarterly equity extraction volumes were near historic lows in the first quarter of 2023, mainly as a share of disposable personal income, researchers said.  

“Owners now looking to move will face increased borrowing costs and higher prices, with current home prices being more than 36% higher than they had been pre-pandemic,” the researchers concluded. “The improved cash flow generated by the recent refinance boom will potentially provide significant support for future consumption.” 

Source: housingwire.com

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Topline

A new policy for mortgage borrowers from U.S.-government-backed institutions has inspired mostly right-wing criticism suggesting the changes benefit individuals with lower credit scores at the expense of borrowers with higher credit scores, but proponents suggest that’s an incomplete characterization of the situation.

Key Facts

Beginning Monday, the Federal Housing Finance Agency altered the loan fees charged to Americans with mortgages from Fannie Mae and Freddie Mac, which provide more than half of all mortgages in the U.S.

According to the Urban Institute, out of 81 types of borrowers classified by down payments and credit scores, the FHFA increased the fees of 23 groups—mainly those with excellent credit scores—by as much as 75 basis points and slashed the fees of 45 groups—largely borrowers with fair scores and lower down payments—by as much as 200 basis points.

Criticism of the plan has escalated in recent days: On Monday, 34 high-ranking financial officials across 27 states sent a letter to Biden claiming the “unconscionable policy” would “further depress” the real estate market and “unfairly cost” middle-class Americans “millions upon millions of dollars.”

But some experts disagree: Jim Parrott and Janneke Ratcliffe of the Urban Institute think tank’s Housing Finance Policy Center point out a separate policy forces borrowers with a down payment of less than 20% to buy mortgage insurance—allowing the FHFA to charge them less because their loans are less risky and making it so less-qualified buyers are still ultimately paying higher fees.

The FHFA is “not raising fees on borrowers with good credit to lower them for those with bad credit,” Parrott explains, arguing the agency is instead “raising fees on loans there is little reason to discount so that it can better serve those who need the help.”

FHFA head Sandra Thompson has also addressed the “misunderstanding,” saying much of the hostility focuses on separate recently announced policies, which ended upfront mortgage fees for low- and middle-income first-time home buyers and upped fees for mortgage seekers for second homes.

Chief Critic

Railing against “President Biden’s mortgage socialism rule,” Rep. Barry Loudermilk (R-Ga.) tweeted Tuesday that borrowers with a credit score of 680 and above with mortgages from Fannie Mae and Freddie Mac will “see a spike in your borrowing costs” to fund the mortgages of individuals with worse credit. It’s unclear what Loudermilk, who sits on the House’s financial services committee, is referring to, as less than half of the down-payment-based groupings of borrowers with credit scores 680 and above saw fee hikes beginning Monday.

Big Number

About $3,200. That’s how much more a borrower in the most-affected qualifying group buying a new home at the average U.S. sale price of $516,500 will pay under the new FHFA rules. These borrowers with credit scores between 720 and 759 taking out a mortgage for between 80% and 85% of the home’s value will pay a 75-basis-point higher fee. Despite the changes, however, the fees remain far greater for individuals with lower credit scores. Borrowers with credit scores over 780 now pay a 0.4% fee for loans worth 75% to 80% of the home price, while borrowers with credit scores below 640 pay a 2.8% fee on the same mortgage.

Contra

“It’s not the case that every category of person with good credit will pay more. There’s not that sort of direct relationship here and it does not affect any particular category of borrower across the board,” George Washington University professor Vanessa Perry told Bloomberg last week.

Key Background

The FHFA policy updates come at a particularly tenuous time for the housing market. Hovering near a two-decade high, 30-year mortgage rates were 6.4% as of last week, more than twice as high as they were at the beginning of last year—before the Federal Reserve started hiking interest rates in its attempt to slow inflation.

Further Reading

What You Need to Know About the Biden Administration’s New Mortgage Fees (Bloomberg)

Spinning Federal Mortgage Fees (Wall Street Journal)

Source: forbes.com

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Washington, DC
CNN
 — 

The United States has never defaulted on its debt, and it remains an unlikely outcome of the current standoff about raising the debt ceiling. But, if it were to happen — which could be as soon as June 1 without intervention — it would further crush an already wounded housing market, according to an analysis by Zillow.

Housing costs would spike by 22% with the rate for 30-year, fixed rate mortgages rising above 8%. There would be 700,000 fewer homes sold in the 18 months after July — that’s almost 12% of the 6 million sales currently expected during that span.

In other words, if you thought this past year of skyrocketing mortgage rates and plunging sales was miserable for the housing market, just wait, there’s more. If the United States defaults on its debts, we can do the past 12 months all over again.

“While we don’t expect a debt default to occur, if it did, it would have unprecedented effects on the financial system,” said Jeff Tucker, a senior economist at Zillow. “This would reduce lending and credit availability throughout the financial system. What that means for the housing market is that the cost of borrowing would rise dramatically and sales would be dropping.”

Triggering a recession

In Zillow’s analysis, interest rates would spike, peaking at 8.4%; and unemployment would surge, peaking at 8.3% from its current rate of 3.4%. This analysis projects what might happen in the event of a prolonged default, and it is not a prediction that a default will occur.

“This would be a scenario of a recession being triggered by a huge contraction in federal outlays,” said Tucker. “Home buyers and sellers finally have been adjusting to mortgage rates over 6% this spring, but a debt default could potentially raise borrowing costs even higher and send the market into a deep freeze.”

Zillow projects the combined impact of buyers and sellers pulling back would wipe out nearly one-quarter of expected sales in some months. If there were to be a debt default, the biggest projected deficit would come in September, with an estimated 23% fewer existing home sales.

The severity of the impact depends a lot on the duration of the drama, Tucker added.

“If the crisis grinds on for longer, all these impacts would last longer and be more severe,” he said. “If it turns out to be a more short-term problem, there would be shocks but I could see the situation where it could come back relatively quickly.”

In the event of the debt ceiling not being addressed, mortgage rates would likely climb quickly as investors become worried about almost every type of bond.

Government issued Treasury bonds have been considered a risk-free, safe-haven for investors. If they suddenly carry risk, Tucker said, “it is an earthquake on which everything else is built.”

Uncertainty in Treasuries being repaid will lead investors to require greater return for purchasing them. Mortgage rates tend to follow yields on 10 year Treasury bonds and would likely rise, too.

“Treasury bonds are used as collateral to back all kinds of loans,” said Tucker. “If you have to second guess the value of collateral, everyone across the board is less willing to lend and only willing for a higher return. It is a picture of contagion and a credit crisis spreading. Everyone is suddenly questioning all kinds of lending.”

With about three weeks till the point at which the government can no longer pay its bills — known as the ‘X-date — the point is approaching when that risk will begin to be priced into lending, if the crisis is not resolved.

“Right now, it’s contained to short-term securities, like one month Treasuries, which have been breaking records,” said Tucker. “It is a looming risk about a month away, so it isn’t yet wreaking havoc on 30-year mortgage rates. But we’re continuing to inch forward into unprecedented territory.”

Even though this is an “unlikely, worst-case scenario of a prolonged default,” as Zillow economists call it, they say homeowner value would hold relatively strong. A small silver lining to this possible catastrophe.

The Zillow analysis projects that if the United States were to default on its debt, home values would begin to fall starting in August, but only by 1% from current levels through February 2024. Even in this dire scenario, home values would still be expected to rise 1% from today to the end of next year. That’s down from a current expectation of 6.5% growth over that period.

Home values tend to fall sharply when the market is flooded with listings. But in this scenario, inventory would shrink below its already historically low levels. Low inventory would keep prices from falling too far, too fast.

Source: cnn.com

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A jumbo loan is something you’ll likely need if you’re looking to purchase a luxurious home, one whose features are more expensive than the average property in the area. What qualifies as a jumbo loan in your neck of the woods depends on the county in which you live. 

Let’s explore the details around getting a jumbo loan. 

What’s a Jumbo Mortgage Loan? 

If you’re in the market for a new home and the asking price is higher than average, you might need to consider getting a jumbo loan.  

Technically, a jumbo loan is a mortgage whose size surpasses the threshold set by government agencies Fannie Mae and Freddie Mac. These government-sponsored enterprises (GSE) are responsible for buying up the lion’s share of U.S. single-family mortgages, but not when it comes to oversized loans. 

Due to their nature as non-GSE products, jumbo mortgages are considered non-conforming loans.   

Considering that jumbo loans fall outside the parameters of the GSEs, they do not qualify for the government guarantees that their conforming loan counterparts receive. As a result, jumbo home loan requirements can be more stringent than secured loan products. 

Jumbo vs. Conventional Loan 

The GSEs were formed so that banks and credit unions would have enough cash on hand to perpetuate the lending process to other homebuyers. 

A key feature of conforming loans is a cap placed on the amount, which protects the government from getting stuck holding too big a bag from borrowers who turn out to be a credit risk. 

Jumbo loans are outsized mortgages for homes on the expensive side of the price spectrum. Often, a jumbo loan is appropriate if you are looking to buy a luxury home that stands out from the pack in the neighborhood, but that’s not always the case. 

In a white-hot real estate market, you might find yourself needing to access a jumbo mortgage to outbid the competition.  

Interest rates attached to jumbo loans are likely to exceed conventional loans because of the bigger risk to lenders. A similarity between jumbo and conventional loans is that both are repackaged and sold to investors in the secondary market. 

However, due to their size, jumbo mortgages attract a different set of investors with a different risk profile.  

Conforming Loan Limit Explained 

The restrictions around conforming loans mainly involve the size of the mortgage. The Federal Housing Finance Agency, the department that oversees Fannie Mae and Freddie Mac, updates these parameters annually. 

In 2021, conforming loan limits prices were $548,250 for single-family homes and increased to $647,200 in 2022.

The conforming loan limits are adjusted each year due to fluctuations in the average U.S. home price. Between Q3 2020 and Q3 2021, the average home price increased an average of 18.05%, which established the baseline from which the conforming loan limit was set.  

Total Mortgage works with borrowers across the United States, making it easy to find a mortgage expert near you. 

How Do Jumbo Loans Work?  

When you’re getting a jumbo loan, it helps to know what to expect beforehand. We have streamlined the mechanics of jumbo mortgages so you’re not taken by surprise: 

  • Higher Rates: Interest rates on jumbo loans tend to be higher than those on conforming loans to reflect the greater risk the lender is inheriting. According to Experian, you can expect a jumbo loan interest rate to be 1-2% higher vs. the going rates for more conventional loan products. 
  • Second Opinion: You might need more than one appraisal. Considering the sheer size of a jumbo mortgage and potentially tough comps by which to compare the home’s market value, lenders may ask for two appraisals. They want to make sure that the value of the home measures up to the price. 
  • Higher Expenses: Expect the closing costs to be higher than traditional loans. Lenders will generally charge a percentage of the home’s total purchase price that’s higher than usual because of the extra vetting that jumbo mortgages lend themselves to.  According to Bankrate, as of Q1 2021, the average closing costs for a typical mortgage range between 2% and 5%, or $6,837 for a single-family property.  

Requirements for a Jumbo Loan

Jumbo home loan requirements will vary from lender to lender, but everything is higher as a general rule of thumb. This is due to the bigger size of these mortgages, which places more risk on the lender’s shoulders. 

Here’s a breakdown of the requirements for a jumbo loan: 

  • Credit Score: You’ll need pristine credit to qualify for a jumbo loan. Lenders will be looking for a FICO credit score of at least 720, though they may be willing to go as low as 660. By comparison, borrowers could qualify for a conventional mortgage with a credit score of as low as 600. 
  • Down Payment Amount: Expect to plunk down anywhere from 20-30% of the home’s purchase price as a down payment. A silver lining is that with a down payment of this size, as long as it doesn’t dip below the 20% threshold, you may not need to invest in private mortgage insurance (PMI). 
  • Debt-to-Income (DTI) Ratio: Lenders want to see that your debt-to-income (DTI) ratio, which is the result of dividing your monthly expenses by your gross monthly income, does not exceed 36%. By comparison, lenders could be willing to overlook a DTI as high as 50% for a conventional mortgage. 
  • Net Worth: Considering the risk that a lender is taking on, they might require borrowers to provide proof that they can liquidate other assets, if necessary. This is to cover the cost of the jumbo mortgage payments for 12 months. 

Explore Total Mortgage’s Jumbo Loan Options

If your next home is one that is probably going to turn some heads, and you’ve got the credit profile and income required, you came to the right place. Consider jumbo loan options from Total Mortgage, whether a 10/1 ARM, 15-year, or 30-year mortgage, and apply online today.

Source: totalmortgage.com

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The 30-year fixed rate for conventional loans was 7.03% at Mortgage News Daily as of Thursday morning. HousingWire’s Mortgage Rates Center had Optimal Blue’s 30-year fixed rate for conventional loans at 6.73% on Wednesday, up from 6.50% the previous Wednesday. 

“Although the probability of a default remains low, even the fears and panic related to a potential government default could cause creditors to ask for higher interest rates from the U.S. Treasury, resulting in a significant increase in various borrowing costs, including mortgages,” Jiayi Xu, an economist at Realtor.com, said in a statement.

Xu added, “Resolving the debt impasse sooner rather than later would mitigate potential adverse effects on the housing market, which is already contending with high prices and elevated mortgage rates.” 

George Ratiu, a chief economist at Keeping Current Matters, agrees that the likelihood of default is “virtually nil” but adds to existing risks, which are reflected in the spreads between the 10-year Treasury and the Freddie Mac 30-year mortgage rate. 

The spreads were at 172 bps on average between 1971 and 2023, but reached 278 bps from January to May 2023. The only times the spreads exceeded 300 bps were during periods of high inflation or economic volatility, such as in the early 1980s or the Great Financial Crisis of 2008-09.

“Investors are reacting to the political brinkmanship over the debt limit, which is injecting another shot of uncertainty into the financial outlook,” Ratiu said in a statement. “Mortgage bond investors are looking for higher yields in exchange for the increase in perceived risk.”

A debt ceiling agreement, however, may not mean less economic volatility. The U.S. can still face a downgrade to its long-term debt. On Wednesday, Fitch Ratings placed the U.S. “AAA” rating on a negative watch. 

“Fitch still expects a resolution to the debt limit before the x-date. However, we believe risks have risen that the debt limit will not be raised or suspended before the x-date and consequently that the government could begin to miss payments on some of its obligations,” the rating agency wrote.  

Fed’s next steps 

Another source of uncertainty is the Federal Reserve‘s (Fed) monetary policy. Officials will meet on June 13-14 to decide on the new federal funds rate. And, despite mortgage industry experts believing the Fed is likely to stop its tightening monetary policy, a still-resilient economy brings the possibility of another rate increase. 

“An additional area of focus revolves around the release of the Federal Reserve’s minutes from its May meeting: although investors anticipate a pause at the upcoming meeting after ten consecutive rate hikes, the minutes revealed a sense of uncertainty regarding the future direction of monetary policy,” Xu said. 

Ratiu added that the Fed’s willingness to take a break from its monetary tightening at the June meeting, as expressed by Chair Jerome Powell, may be a welcome reprieve for financial markets. 

“However, the Fed has its eyes clearly fixed on the inflation double-peaks from the late 1970s and early 1980s, seeking to avoid the same mistake,” Ratiu said. “For people who assume that the central bank is done pushing the policy rate higher, prices riding an upward trajectory may provide a counterpoint.” 

According to Sam Khater, Freddie Mac’s chief economist, the U.S. economy is showing continued resilience which, combined with debt ceiling concerns, led to higher mortgage rates this week.   

“Dampened affordability remains an issue for interested homebuyers and homeowners seem unwilling to lose their low rate and put their home on the market,” Khater said in a statement. “If this predicament continues to limit supply, it could open up an opportunity for builders to help address the country’s housing shortage.”

Source: housingwire.com

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The numbers: A shortage of properties for sale and high mortgage rates have stalled contract signings on U.S. homes in April. 

Sales remain unchanged from the previous month, according to the monthly index released Thursday by the National Association of Realtors (NAR).

The number didn’t meet Wall Street economists’ forecast, as they had expected pending home sales to rise 0.8% in April.

Aside from a limited number of for sale listings, the 30-year mortgage is back above 7%, both of which are making homeownership expensive for the typical home buyer.

The 30-year was averaging at 7.03% as of Thursday morning, according to Mortgage News Daily.

Pending home sales reflect transactions where the contract has been signed for an existing-home sale, but the sale has not yet closed. Economists view it as an indicator for the direction of existing-home sales in subsequent months.

Big picture: The housing market is facing a major crunch as there’s not many options for home buyers on top of rising interest rates and making mortgage payments more expensive for would-be buyers.

Unless rates fall enough to entice homeowners with ultra-low mortgage rates to sell, or there’s a sudden burst of inventory, the sector will likely see the crunch persist. Meanwhile, builders — one of the few players creating housing units — are pretty upbeat about their future.

What the realtors said: “Not all buying interests are being completed due to limited inventory,” NAR Chief Economist Lawrence Yun said. “Affordability challenges certainly remain and continue to hold back contract signings, but a sizeable increase in housing inventory will be critical to get more Americans moving.”

Source: marketwatch.com

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The Fed has played a major role in consumer mortgage rates over the past decade and change.

Back in 2008, they began purchasing hundreds of billions in mortgage-backed securities (MBS). This was known as quantitative easing, or QE for short.

The goal was to drive interest rates lower and increase the money supply. Doing so would boost economic activity, aka lending, and help us out of the Great Recession.

But there were consequences to such a plan – namely something called inflation.

The Fed also knew it couldn’t hold onto these assets forever, but how would they unload without riling the markets?

Quantitative Easing Led to Raging Inflation

The Fed conducted four rounds of quantitative easing, which involved buying both MBS and U.S. treasuries.

The final round of QE extended all the way into 2020 as the COVID-19 pandemic dislocated the world economy.

In the process, mortgage rates hit all-time record lows. The 30-year fixed dipped as low as 2.65% during the week ending January 7th, 2021, per Freddie Mac.

And the 15-year fixed fell to 2.10% on July 29th, 2021. These low rates were unprecedented.

They were so cheap that they set off a housing market frenzy, with home prices rising nearly 50% from late 2019 to mid-2022.

Clearly this was unhealthy growth, and a symptom of easy money.

Fed Finally Takes Action to Cool the Housing Market

The Fed realized that they had an inflation problem. They also realized housing demand had gotten completely out of control.

Folks were buying homes for any price, thanks in huge part to the record low mortgage rates on offer.

It wasn’t just a housing supply issue, as some had pointed out. This meant they had the power to cool off the overheated housing market, simply by reversing course.

Once they finally took notice, quantitative tightening (QT) was implemented in mid-2022. It works the exact opposite way of QE.

Instead of buying, they’re letting these securities run off. And this means unloading treasuries and MBS, albeit at a reasonable rate with caps in place.

Without a big buyer of MBS, supply increases, bond prices drop, yields rise, and consumer mortgage rates go up.

No one could have guessed how much they’d rise in such a short period. That too was unprecedented.

Mortgage rates essentially doubled in a year, the first time that has happened on record.

The 30-year fixed ended 2022 at 6.42%, up from about 3.11% a year earlier, per Freddie Mac. Mission accomplished.

Home Prices Peak and Begin to Fall

Once the reality of much higher mortgage rates set in, the housing market stalled and began to fall.

It began with decelerating year-over-year gains, which were in the double-digits. And eventually led to month-over-month declines.

The latest report from CoreLogic shows home prices increased 8.6% in November 2022 compared with November 2021.

But on a month-over-month basis, were down 0.2% in November 2022 compared with October 2022.

They’re currently still expected to rise 2.8% from November 2022 to November 2023.

However, individual markets have seen much bigger declines, especially if you consider peak prices that might not be captured in the data.

Zillow recently pointed out that home values were actually lower than last December in Austin (-4.2%), San Francisco (-2.0%), and Seattle (-0.6%).

This has caused a lot of people to ring the alarm bells, calling for another housing market crash.

But wait…

Low Mortgage Rates to the Rescue?

While much higher mortgage rates made 2022 an awful year for home buyers, real estate agents, and mortgage industry workers, 2023 might be better.

Sure, it seemed as if we were on the precipice of a crash, but it was mostly driven by substantially higher mortgage rates.

At their worst, 30-year mortgage rates climbed above 7% in late 2022, but there’s been some serious relief since.

The 30-year fixed is back around 6%, and if you’re willing to pay discount points, rates in the low-5% range aren’t out of the question.

Aside from this being psychologically better, lower rates boost affordability and allow home sellers to fetch higher asking prices.

This means the spring home buying/selling season might actually be decent. It also means forecasts for home prices to rise year-over-year could hold up.

Of course, holding up is a lot different than years of double-digit gains.

But it does represent a healthier housing market, which we should all be happy about.

Inflation May Have Peaked

If you look at the last few CPI reports, it appears inflation may have peaked. We’re not out of the woods, but there are positive signs.

At the same time, the Fed may also be done raising its own target fed funds rate. The prime rate is dictated by the fed funds rate.

This has increased HELOC rates for scores of homeowners. If/when the Fed stops raising and begins lowering their own rate, HELOC rates can come down.

That will spell more relief for existing homeowners with these lines of credit.

Perhaps more importantly, if inflation truly has peaked and is falling, long-term mortgage rates can come down too.

Lower mortgage rates will buffer the housing market and limit any downward movement on home prices.

These lower mortgage rates may even benefit the Fed!

Okay, How Do Lower Mortgage Rates Benefit the Fed?

I may have buried the lede, but we got here eventually.

Remember, the Fed has a ton of MBS on its balance sheet. At last glance, around $2.6 trillion.

They’re currently letting up to $35 billion in MBS mature and “run off” each month.

Since QT began in June 2022, its MBS holdings have fallen by roughly $67 billion, or about 2.5%. That’s apparently too slow.

Here’s the problem the Fed is facing. With current mortgage rates significantly higher than the rates on all those MBS, no one is refinancing their mortgage or selling their home.

So most of these MBS aren’t getting paid off. This may force the Fed to outright sell the MBS, which would likely be bad for rates.

But if mortgage rates drop back to more reasonable levels, we might see an uptick in home sales, mortgage refinancing, and so on. If that happens, the associated MBS get paid off.

This would allow the Fed to unload their trillions in MBS a lot faster. And that could benefit the Fed without upsetting the markets.

So in a sense, the Fed could begin to root for lower mortgage rates. Not 2-3% rates, but rates in the 4-5% range.

Also, a recent Fed working paper found that an expansionary monetary policy allows low-wealth households “to get their foot in the door” and build wealth via homeownership.

Meanwhile, tighter policy “appears to prevent many lower-income families from buying homes.”

Read more: 2023 Mortgage Rate Predictions

Source: thetruthaboutmortgage.com