I’ve already written about it not being the best time to buy a home right now, at least from a pure investment standpoint.
In short, home prices are expensive relative to incomes, mortgage rates have more than doubled, and there’s little quality inventory.
And now we can quantify just how long it takes to break even on a house, per a new analysis from Zillow.
Hint: it’s a long, long time, even if you’re able to muster a big 20% down payment.
So if you’re thinking about buying a home today, prepare to stick around for the long-haul.
How Long to Break Even on a House These Days?
– 3% down payment: 13 years and six months to make a profit. – 5% down payment: 13 years and three months to make a profit. – 10% down payment: 12 years and seven months to make a profit. – 20% down payment: 11 years and three months to make a profit.
A new Zillow analysis tried to determine how long you’d need to own your home before you could sell it for a profit.
This factors in the closing costs associated with the home purchase, the mortgage interest paid, home maintenance costs, and the sales costs once it came time to list the property.
Specifically, they assume 3% closing costs at purchase, 1% home maintenance fees, and 6% in closing costs at the time of sale, along with all that mortgage interest.
In reality, it could be even higher. It’s not unusual for real estate agents to charge 5-6% of the sales price.
So if you’re putting down just 3%, you’re already in the hole, especially once you consider those closing costs as well.
To offset all those expenses, you need to make regular payments to principal each month and hope the property appreciates in value over the years as well.
The rule of thumb says it normally takes about 3-7 years to break even on a home purchase, with perhaps five years the average.
But that number has risen sharply lately thanks to a combination of sky-high asking prices and equally expensive mortgage rates.
How long you ask? Per Zillow, home buyers today can expect to spend approximately 13.5 years in their house before being able to sell at a profit!
In other words, you better really like your house unless you want to sell for a loss, or worse, be forced to do a short sale.
It Takes More Time to Turn a Profit in Affordable Housing Markets
And here’s the irony. It actually takes longer to turn a profit in more affordable housing markets.
Those purchasing a home in places like Cleveland, Baton Rouge, El Paso, Akron, or Indianapolis might need to wait at least 20 years to reach this crucial profit point.
As for why, it’s because of the slower historical growth rate in these more affordable areas.
Without home price appreciation doing most of the heavy lifting, it takes a lot more time to build home equity.
Simply put, principal payments are a lot less impactful than increases in property values, especially on a high-rate mortgage where most of the payment goes toward interest.
It’s the worst in Cleveland, where Zillow says it can take a whopping 22 years and 10 months to turn a profit.
Similar timelines can be seen in the other metros mentioned, meaning it’s not always advisable to buy a home just because it’s cheap.
There’s a Faster Road to Profit in Expensive Housing Markets
Again, while seemingly counterintuitive, it’s actually easier to turn a profit if you buy a home in an expensive metro.
Of course, the barrier to entry will likely be higher, but it’s one of those rich get richer stories.
For example, in notoriously expensive Bay Area metros such as San Jose or San Francisco, California, the break-even timeline to profit is a much shorter 7 to 7.5 years.
This is still a long time historically speaking, but it is considerably less than in those “cheap” housing markets.
Similar short purchase-to-sale profit timelines can be found in San Diego, Los Angeles, and Miami.
As you can see, these are highly-sought after cities where demand always tends to be strong, and supply always low. And because of that, home prices are often rising.
But there’s a big barrier to entry, whether it’s the high asking price or the large down payment required.
Either way, this data tells us it might not be the best time to purchase a home at the moment, even if you can muster a 20% down payment.
It could be advantageous to wait for a better combination of lower asking prices, cheaper mortgage rates, and better inventory.
Of course, there are reasons to buy a home other than for the investment. But you still need to be prepared to stick around for a while.
Read more: Pros and cons of renting vs. buying a home
Earning six figures is nothing to sneeze at. If you make $160,000 a year and you’re looking to buy a home, you’re likely to have more options than many other folks — the median household income in the U.S. is less than half of that at $74,580 a year, according to U.S. Census data.
Finding a home you can comfortably afford that meets your needs isn’t always easy, though, no matter how much you earn. Here’s how to determine how much house you can afford on a $160K salary, without stretching yourself too thin.
The 28/36 rule
The 28/36 rule, which suggests that you shouldn’t spend more than 28 percent of your gross monthly income on housing costs, is a good starting point. The 36 percent part is how much of your income goes to all your debt in total, including housing and also things like student loans and credit card bills.
This is more of a guideline than a hard-and-fast rule, but it’s a useful method to help you figure out how much you can afford to spend on a home while still being able to meet your other financial obligations. Many lenders do take it into consideration when reviewing mortgage applications.
How much house can you afford?
When using the 28/36 rule, start by dividing your salary by 12 to come up with a monthly figure, and then multiply that figure by 0.28 to get 28 percent. Here’s how it breaks down with your $160,000 salary:
$13,333 x 0.28 = $3,733 (the most you should spend on housing costs each month)
$13,333 x 0.36 = $4,800 (the most you should spend on total debt each month)
Bankrate’s mortgage calculator can help you figure out how that $3,733 monthly payment translates into an actual home price. Assuming a 20 percent down payment and a 7.5 percent interest rate on a 30-year mortgage, the monthly principal and interest payment on a $600,000 home would come to $3,356. That gives you a cushion of about $377 to account for property taxes and homeowners insurance premiums, which will vary based on your location, before you hit the $3,733 maximum.
So your $160,000 salary will afford you a $600,000 home — hypothetically. Keep in mind that these calculations do not include your down payment or closing costs.
Here are some other things to consider while you budget:
Your credit score: Those with the highest credit scores will qualify for the lowest interest rates.
Your debt-to-income ratio: DTI is a measure of your debt as compared to your income — how much money is coming in vs how much is going out, so to speak.
Your down payment amount: A typical 20 percent down payment on $600,000 comes to $120,000, a hefty amount to have to pay upfront. Many loans have lower down payment requirements, but the more you pay upfront, the less you have to borrow. That means lower monthly payments and less interest to pay. Putting down a full 20 percent also lets you avoid having to pay extra for private mortgage insurance.
Your desired location: Different areas have different housing markets, and your $600,000 budget will go a lot farther in some areas than others. In Miami, for example, the median home price is $580,000, according to September Redfin data. So your budget will get you something very close to the middle of the market there. In a pricier city like San Diego, where the median price is $890,000, it won’t stretch nearly as far, but in a more affordable one like Indianapolis, where the median is just $235,000, you might wind up with something like a mansion.
Home financing options
Even with your high salary, you probably don’t have $600,000 in cash burning a hole in your pocket. There are several financing options you can explore when buying a home.
Different types of loans
Many types of mortgage products can help you make this high-ticket purchase. Most options have minimum credit score and down payment requirements. FHA loans, insured by the Federal Housing Administration, have more flexible requirements than conventional loans, but with a $160,000 salary, a conventional loan is likely your best bet. The higher your credit score, the better terms you’ll qualify for. And if you’re an active or retired military service member, look into a VA loan, which may require no down payment at all.
First-time homebuyer programs
Assistance programs exist at local, state and federal levels to help buyers meet the rigorous financial demands of homeownership. Qualified first-time buyers may be eligible for grants or special loans to help them cover down payment and closing costs — however, these programs typically have income limits, and your high salary may mean you don’t qualify.
Get preapproved for a mortgage
A preapproval letter from a lender is an important tool to have in your arsenal. Getting preapproved for a mortgage tells you how much a lender is likely to loan you, which can be crucial when setting your budget and narrowing down which listings are in your price range. If you’re looking in a very competitive market, it can also give you an edge over other buyers who are not preapproved. Shop around for lenders based on interest rates, fees and other services — but remember that, when you’re ready to buy, you’re not obligated to go with the same lender that preapproved you.
Next steps
Ready to jump into the market and see how much house you can afford on your $160,000 salary in your area? Be sure to have a local real estate agent at your side to guide the way. An agent that knows the area you’re looking in well can help you find the options that best meet your needs — and your budget.
2023 has been a difficult year for prospective homebuyers, who have faced soaring mortgage rates, expensive home prices and low housing inventory. But last week, several important mortgage rates began sliding downward in what could be an about-face in long-term highs. There was a marked improvement in 15-year fixed and 30-year fixed mortgage rates, and the 5/1 adjustable-rate mortgage also decreased.
Since early 2022, when the Federal Reserve kicked off aggressive interest rate hikes to combat inflation, mortgage rates have increased steadily from their historic pandemic-era lows. Mortgage rates are now at their highest peak in more than two decades. Home affordability is at the worst level in nearly four decades, and home loan applications have made new cyclical lows, according to the housing authority Fannie Mae.
While the central bank does not directly set mortgage rates, they’re affected by the Fed’s rate decisions. During its Nov. 1 policy meeting, the Fed held its key interest rate steady at a range of 5.25% to 5.5%. Historically, when the Fed stops hiking rates, mortgage rates tend to cool, according to Logan Mohtashami, lead analyst at HousingWire. However, inflation is still too high, and there’s a chance the Fed may carry out one more rate hike in December.
About these rates: Like CNET, Bankrate is owned by Red Ventures. This tool features partner rates from lenders that you can use when comparing multiple mortgage rates.
Fluctuations in the mortgage and housing markets are always going to happen. That’s why experts say it’s a good idea for homebuyers to focus on what they can control: getting the best rate for their financial situation.
Mortgage rate trends
With average mortgage rates around 8%, the question is what the rest of the year has in store for prospective homebuyers. Experts say mortgage rates will remain near their current levels in the coming weeks. Fannie Mae expects the average 30-year fixed mortgage rate to close out the year at 7.3%.
Moreover, wage growth hasn’t kept up with inflation, and household income hasn’t outpaced increased housing costs. According to a recent report by the real estate firm Redfin, homebuyers need an income of $114,627 in order to afford a median-priced house. That’s $40,000 more than what the typical US household earns.
“As long as prices stay elevated, the way to help ease housing affordability is for wages to grow and mortgage rates to fall,” Mohtashami said.
Over the long term, progress on inflation and other key economic indicators could potentially ease some of the upward pressure on mortgage rates. But even when the Fed stops hiking interest rates, it generally takes 12 months before mortgage rates see substantial declines, according to Niladri Mukherjee, chief investment officer at TIAA Wealth Management.
“Until mortgage rates drift back down to a reasonable level, let’s say 5.5% or 6%, I don’t think mortgage applications are going to pick back up again,” Mukherjee told CNET.
Average mortgage interest rates today
We use data collected by Bankrate to track daily mortgage rate trends. This table summarizes the average rates offered by lenders across the country:
Loan type
Interest rate
A week ago
Change
30-year fixed rate
7.79%
8.05%
-0.26
15-year fixed rate
7.15%
7.19%
-0.04
30-year jumbo mortgage rate
7.75%
8.02%
-0.27
30-year mortgage refinance rate
7.92%
8.15%
-0.23
Rates as of Nov. 6, 2023.
What homebuyers should know about mortgage rates
High mortgage rates discourage prospective homebuyers and potential sellers alike. Most homeowners have an interest rate well below 6% and aren’t willing to move because it would mean giving up their low mortgage rate, said Jason Walter, real estate agent at Realty One Group Complete. “That’s one of the main reasons why existing housing inventory remains 40% below pre-COVID levels,” he said.
While today’s housing market is especially intimidating for first-time homebuyers, it doesn’t mean it’s unrealistic to buy. That all depends on your financial situation and long-term goals.
The most important thing is to make a budget and try to stay within your means. Though mortgage rates and home prices are high, the housing market won’t be unaffordable forever. It’s always a good time to save for a down payment and improve your credit score to help you secure a competitive mortgage rate when the time is right for you.
What is a good loan term?
When picking a mortgage, remember to consider the loan term, or payment schedule. The most common mortgage terms are 15 years and 30 years, although 10-, 20- and 40-year mortgages also exist. Mortgages can either be fixed-rate and adjustable-rate mortgages. The interest rates in a fixed-rate mortgage are set for the duration of the loan. The interest rates for an adjustable-rate mortgage are only fixed for a certain amount of time (commonly five, seven or 10 years), after which the rate adjusts annually based on the current interest rate in the market.
When choosing between a fixed-rate and adjustable-rate mortgage, consider the length of time you plan to live in your home. If you plan on living long-term in a new house, a fixed-rate mortgage may be the better option. Fixed-rate mortgages offer more stability over time compared to adjustable-rate mortgages, but adjustable-rate mortgages may offer lower interest rates upfront. As a result, a growing share of homebuyers are leaning toward ARMs.
30-year fixed-rate mortgages
The average 30-year fixed mortgage interest rate is 7.79%, which is a decline of 26 basis points from one week ago. (A basis point is equivalent to 0.01%.) A 30-year fixed mortgage, the most common loan term, is a good option if you’re looking to minimize your monthly payment. A 30-year fixed rate mortgage will usually have a lower monthly payment than a 15-year one, but often a higher interest rate.
15-year fixed-rate mortgages
The average rate for a 15-year, fixed mortgage is 7.15%, which is a decrease of 4 basis points from seven days ago. Though you’ll have a bigger monthly payment compared to a 30-year fixed mortgage, a 15-year loan will usually be the better deal if you can afford the monthly payments. You’ll usually be able to get a lower interest rate, pay less interest in the long run and pay off your mortgage sooner.
5/1 adjustable-rate mortgages
A 5/1 ARM has an average rate of 7.08%, a slide of 4 basis points compared to last week. You’ll typically get a lower interest rate (compared to a 30-year fixed mortgage) with a 5/1 ARM in the first five years of the mortgage. But you could end up paying more after that time, depending on how the rate adjusts with the market rate. For borrowers who plan to sell or refinance their house before the rate changes, an ARM could be a good option. If not, changes in the market may significantly increase your interest rate.
How to find personalized mortgage rates
You can get a personalized mortgage rate by contacting your local mortgage broker or using an online calculator. To find the best home mortgage, take into account your goals and current finances. Be sure to look at the annual percentage rate, or APR, which reflects the mortgage interest rate plus other borrowing charges. By comparing the total cost of borrowing from multiple lenders, you can make a more accurate apples-to-apples comparison.
Your specific mortgage rate will vary based on factors including your down payment, credit score, debt-to-income ratio and loan-to-value ratio. Having a higher down payment, a good credit score, a low DTI and LTV or any combination of those factors can help you get a lower interest rate.
The interest rate isn’t the only factor that affects the cost of your home. Be sure to also consider fees, closing costs, taxes and discount points. You should shop around and talk to several different lenders from local and national banks, credit unions and online lenders to find the best mortgage for you.
California’s population of homeless veterans has plateaued despite billions of dollars in state spending to create housing for former military service members. Now, Gov. Gavin Newsom wants to shift the state’s resources to focus on veterans with serious mental health conditions.
$6.4 billion mental health bond he’s sending to voters in the March primary election, would set aside funding specifically for veterans with serious behavioral health conditions.
That’s a shift from California’s last two major efforts to fund housing for veterans, both of which created units for a general population of former military service members.
The first effort began in the late 1990s, when the state built seven new veterans’ homes over a period of 17 years. Today those veterans homes are underused. They were built to house about 2,400 people, but only 1,575 veterans live in them. The 300-unit veterans home in Barstow was so underutilized in 2020 that Newsom moved to close it as he braced for a pandemic recession, although lawmakers blocked him from shutting the site.
The second push centered on a pair of ballot measures voters approved in 2014 and in 2018 that allocated $4.6 billion to build housing specifically for former military service members. The money created the Veterans Housing and Homelessness Prevention Program, which has supported the construction of about 3,250 housing units for veterans to date.
Veterans advocates and state officials view the programs — along with federal efforts led by the Department of Veterans Affairs — as successful in reducing homelessness among former military service members. In the last 12 years, veteran homelessness in California has decreased by more than 30%.
But the trend in California mostly accounts for gains made during the Obama administration, when veteran homelessness peaked nationwide and the Department of Veterans Affairs moved aggressively to place former troops in housing. Since 2014, the number of homeless veterans in California has mostly plateaued around 10,000 to 12,000 people, according to annual counts released by the Department of Housing and Urban Development.
Alex Visotzky, senior California policy fellow at the National Alliance to End Homelessness, said the high numbers of veteran homelessness result from the challenges veterans face on returning home in California’s competitive housing market.
“When housing markets are unaffordable and incredibly competitive, those with the greatest needs are going to be more likely to fall out,” he said.
Newsom’s new strategy in the mental health bond, advocates say, should help those most in need. The California Department of Veterans Affairs estimates that half of the state’s unhoused veterans suffer from some kind of behavioral health issue.
The money in the bond would go to the state’s Department of Housing and Community Development, which would work with CalVet “to focus specifically on housing veterans experiencing behavioral health challenges,” said Assemblymember Jacqui Irwin, the Thousand Oaks Democrat who wrote the bill that ultimately put the bond on the ballot.
Studies have shown veterans are overrepresented in the nation’s homeless population. They may experience personal challenges, such as post-traumatic stress disorders or other mental health issues as well as disabilities related to their military service.
“Transitioning from that very specific culture and society to civilian life is a lifelong process,” said Amy Fairweather, director of policy at the veterans advocacy group Swords to Plowshares. “If you do have any physical or mental disabilities, dealing with those and trying to re-enter civilian life can be very difficult.”
Napa County as the state’s first veterans home. That site is still in operation, housing around 600 veterans on a picturesque property in wine country.
Altogether, the state now has eight veterans homes. The two largest homes are in fairly remote communities — one is in Napa County’s Yountville and the second is in Barstow in the Mojave Deserts. Moving to them can mean living at a long distance from a veteran’s family. That geography somewhat limits interest in the homes.
The homes account for the lion’s share of CalVet’s $650 million annual budget. Some advocates have called on the state to put money into programs that would benefit people who don’t necessarily want to live in a veterans home.
“The state should keep its promises to the current home residents, but as things change, the program needs to be less structured on just providing room and board for a very limited number of people and more structured on providing skilled nursing facility care for those who need it,” said Ethan Rarick, executive director at Little Hoover Commission, which published a report on the veterans homes in 2017.
Outside of the veterans homes, California approved a series of bonds meant to help military service members find housing beginning in 2008. The Veterans Bond Act, passed that year, provided $900 million to veterans through the CalVet Home Loans Program.
In 2014, California passed an initiative creating the Veterans Housing and Homelessness Program, which put $600 million toward building multi-family homes for veterans. A second ballot initiative in 2018 gave another $4 billion to the program.
The federal Department of Veterans Affairs, meanwhile, has kept up steady funding for housing vouchers that can provide a place to live for former troops. The Veterans Affairs Supportive Housing program, commonly known as HUD-VASH, was a centerpiece of the Bush and Obama administration’s efforts to curb veterans’ homelessness. It provides rental assistance to over 100,000 veterans nationally.
A steep drop in veteran homelessness
The number of homeless veterans in the U.S. peaked in the Great Recession, when the VA in 2007 reported some 154,000 former troops were homeless.
At that time, Fairweather of Swords to Plowshares said many of those deployed in the Iraq and Afghanistan wars were starting to come back home “to a society that wasn’t prepared for it.”
On top of that, they and older veterans struggled in the economic downturn, which led to more unemployment and homelessness.
“It all came together in a way that was really disadvantageous to the veterans,” she said.
Last year, the VA estimated about 33,000 veterans were homeless nationwide. According to the 2021 annual homelessness assessment report by the federal Department of Housing and Urban Development, more than half of them are over age 55. The data also shows that Black veterans are more likely to be homeless than veterans belonging to other races.
Advocates say veterans can be reluctant to ask for help.
“When veterans ultimately fall down that hole into homelessness, what is happening along with that is that they’re losing connection with friends and family, because they’re ashamed that their life is falling apart and it’s hard for them to ask for help,” said Stephen Peck, president of the veterans support organization U.S. Vets.
San Francisco native and Army veteran Latoya White has struggled to stay housed in the dozen years since she left the service. She has found it difficult to afford rent even though she was able to keep decent jobs at a grocery store, the San Francisco airport, and now as a city bus driver.
She was unfamiliar with the resources the VA offered to veterans, like housing vouchers.
“I’ve always had benefits through my job. I don’t think that then the VA had as many resources as they have now. I did go to the VA and they’re so limited on what they could help me with. So, you know, I just went and got a job and I just was really self sufficient,” she said.
After sleeping in her car and couchsurfing for several years, White reached out for help from the advocacy group Swords to Plowshares. That led her to transitional housing, and then to an apartment in San Francisco this June through the HUD-VASH program.
“A lot of us didn’t even know anything about the HUD-VASH program,” said White, 34. “A lot of veterans don’t even know that there is assistance out there for them.”
What does Newsom want to do?
Putting the money into the mental health bond comes with a tradeoff.
In advancing Newsom’s mental health plan, lawmakers amended an early version of Assemblymemer Irwin’s veterans’ housing bill that would have issued more bonds for the existing veterans’ housing program. Without new funding, the program that supports construction of multi-unit veterans’ housing is expected to run out of money in 2024.
Still, representatives for Newsom’s ballot measure in a written statement said the bond would create more capacity to help former troops.
“Proposition 1 adds new money for California’s most vulnerable veterans without any redirection or reprioritization from the current program. Without Proposition 1, there would be zero funding for homeless veteran housing moving forward, which is why the measure is so critically needed,” the statement read.
All together, the ballot measure going to voters includes $6.4 billion to fund projects for behavioral health issues and those at the risk of homelessness. It also includes a proposal to adjust how the state spends money it collects for mental health services from a tax on personal income over $1 million, aiming to direct more of the money to housing.
The $1 billion for veterans housing will be distributed in the form of loans and grants by the Department of Housing and Community Development.
Representatives from veterans’ groups say the program’s success could hinge on getting the word out, and providing services that provide a path out of homelessness.
At U.S. Vets, Peck said the nonprofit strives to create a community where veterans help veterans.
“Building that community is really important,” he said. “A federal veteran who’s been through the process already is probably more effective than we are as social workers.”
Gibson, who currently lives in transitional housing provided by Swords to Plowshares, has started to find that community through the nonprofit.
“I talked to them about how I’m struggling with some issues and they are pretty open and supportive about it,” she said.
Gibson hopes that federal and state services fund more community-oriented programs like hers, so more veterans are able to feel like they are home.
Supported by the California Health Care Foundation (CHCF), which works to ensure thatpeople have access to the care they need, when they need it, at a price they can afford. Visit www.chcf.org to learn more.
The world’s central banks have unleashed the steepest series of
interest-rate increases in decades during their two-year drive to tame
inflation—and they may not be done yet. Policymakers have raised rates by
about 400 basis points on average in advanced economies since late 2021,
and around 650 basis points in emerging market economies.
Most economies are absorbing this aggressive policy tightening, showing resilience over the past year, but core inflation remains elevated in several
of them, especially the United States and parts of Europe. Major central
banks therefore may need to keep interest rates higher for longer.
In this environment, risks to the world economy remain skewed to the
downside, as we detail in in our Global Financial Stability Report. Though this latest assessment of vulnerabilities is similar to what we
noted in April, the acute stress we saw in some banking systems has since
subsided. However, we now see indications of trouble elsewhere.
One such warning sign is the diminished ability of individual and business
borrowers to service their debt, also known as credit risk. Making debt more
expensive is an intended consequence of tightening monetary policy to
contain inflation. The risk, however, is that borrowers might already be in
precarious positions financially, and the higher interest rates could
amplify these fragilities, leading to a surge of defaults.
Eroding buffers
In the corporate world, many businesses suffered closures during the
pandemic, and others emerged with healthy cash buffers thanks in part to
fiscal support in many countries. Firms were also able to protect their
profit margins even though inflation had picked up. In a higher-for-longer
world, however, many firms are drawing down cash buffers as earnings
moderate and as debt servicing costs rise.
Indeed, the GFSR shows increasing shares of small and mid-sized firms in
both advanced and emerging market economies with barely enough cash to pay
their interest expenses. And defaults are on the rise in the leveraged loan
market, where financially weaker firms borrow. These troubles are likely
going to worsen in the coming year as more than $5.5 trillion of corporate
debt comes due.
Households too have been drawing down their buffers. Excess savings in
advanced economies have steadily declined from peak levels early last year
that were equal to 4 percent to 8 percent of gross domestic product. There
are also signs of rising delinquencies in credit cards and auto loans.
Headwinds also confront real estate. Home mortgages, typically the largest
category of household borrowing, now carry much higher interest rates than
just a year ago, eroding savings and weighing on housing markets. Countries
with predominantly floating rate mortgages have generally experienced
larger home price declines as higher interest rates translate more quickly
into mortgage payment difficulties. Commercial real estate faces similar
strains as higher interest rates have resulted in funding sources drying
up, transactions slowing, and defaults rising.
Higher interest rates also are challenging governments. Frontier and
low-income countries are having a harder time borrowing in hard currencies
like the euro, yen, US dollar and UK pound as foreign investors demand
greater returns. This year, hard currency bond issuances have occurred at much
higher coupon—or interest—rates. But sovereign debt concerns do not only apply to low-income countries, as the recent surge in longer-term interest rates in advanced economies has demonstrated.
By contrast, major emerging economies largely do not face this predicament
given better economic fundamentals and financial health, although the flow
of foreign portfolio investment into these countries has also slowed.
Material amounts of foreign investment have left China in recent months as
mounting troubles in its property sector have dented investor confidence.
Spillover effects
Most investors appear to have shrugged off mounting evidence that borrowers
are having repayment troubles. Along with generally healthy stock and bond
markets, financial conditions have eased as investors appear to expect a
global soft landing, in which higher central bank interest rates contain
inflation without causing a recession.
This optimism creates two problems: relatively easy financial conditions
could continue to
fuel inflation, and rates can tighten sharply if adverse shocks occur—such as an
escalation of the war in Ukraine or an intensification of stress in the
Chinese property market.
A sharp tightening of financial conditions would strain weaker banks
already facing higher credit risks. Surveys from several countries already
point to a slowdown in bank lending, with rising borrower risk cited as a
key reason. Many banks will lose significant amounts of equity capital in a
scenario where high inflation and high interest rates prevail and the
global economy tips into recession, as we explore in a
forthcoming GFSR chapter. Investors and depositors will scrutinize the
prospects of banks if their stock-market capitalization falls below the
value of balance sheet, causing funding problems for the weak bank. Outside
of banking system, fragilities are also present for nonbank financial
intermediaries, such as hedge funds and pension funds, that lend in private
markets.
Reassuringly, policymakers can prevent bad outcomes. Central banks must
remain determined in bringing inflation back to target—sustained economic
growth and financial stability is not possible without price stability. If
financial stability is threatened, policymakers should promptly use
liquidity support facilities and other tools to mitigate acute stress and
restore market confidence. Finally, given the importance of healthy banks
to the global economy, there is a need to further enhance financial sector
regulation and supervision.
For a period of a little over three years from June 2020—after covid had just broken out—to June 2023, core inflation was higher than 5%. Over the last three months, it has been lower than 5%. In September, core inflation was at 4.6%, the lowest it has been since March 2020, when it was at 3.8%. Core inflation is the inflation among the items that remain, after leaving out food, fuel and light items in the consumer price index. They form 54.1% of the overall index.
A possible explanation for the fall lies in the fact that the Reserve Bank of India (RBI) started raising the repo rate—the rate at which it lends to banks—in May 2022. Between then and now, the repo rate has gone up from 4% to 6.5%. This rise, among other things, has pushed up interest rates across the financial system.
The hope is that as interest rates go up, people and businesses cut down on their consumption, slowing down the growth in demand and the growth in wages, leading to lower inflation.
But this doesn’t happen overnight. The transmission of monetary policy of a central bank—in the form of higher interest rates slowing down consumption growth and discouraging corporates to borrow and expand—and that in turn helping control inflation, takes time. This time gap is referred to as the lag. Now, how long is the lag in the Indian case? Viral V. Acharya, while he was a deputy governor of RBI, had said in a November 2017 speech: “Monetary policy actions are felt… with a lag of 3-4 quarters on inflation.”
When RBI started raising the repo rate in May 2022, core inflation had stood at 6.2%. It continued to be above 6% until February 2023, except in July 2022 when it was at 5.95%. Since March 2023, it has been lower than 6%. Clearly, as Acharya had said, it has taken the monetary policy nearly three to four quarters to have an effect.
But one area where the higher interest rates haven’t seemed to have had an impact is in the disbursal of housing loans. From January to May 2022, before and around the time RBI started raising the repo rate, the growth in the outstanding housing loans of banks—which give out a bulk of these loans—had stood at around 13%. Post-May 2022, it has stood largely in the range of 14-16%. The increase in the months of July and August has been 37.4% and 37.7%, respectively. But this has been because of the merger of HDFC—which was a housing loan lender—with HDFC Bank. The data published by RBI on the lending done by banks by economic activity doesn’t adjust for this merger, forcing us to use June numbers.
The housing loan interest rates before May 2022 had stood at 6.5-7%. Now they are at around 8.4% to 10%, with housing loan equated monthly instalments (EMIs) having jumped 20%. But this hasn’t slowed down their disbursal. Why? The answer lies in looking at the breakdown of housing loans between priority sector loans and the non-priority loans. Priority sector housing loans are defined as: “Loans to individuals up to ₹35 lakh in metropolitan centres (with a population of 10 lakh and above) and up to ₹25 lakh in other centres… provided the overall cost of the dwelling unit in the metropolitan centre and at other centres does not exceed ₹45 lakh and ₹30 lakh, respectively.” The remaining loans are non-priority loans.
In the months leading up to May 2022, priority sector housing loans formed around 35-36% of the overall outstanding housing loans of banks. By June 2023, they had fallen to 31.5%, implying that banks are giving out more non-priority housing loans. Of course, these loans are largely taken on by the well-to-do, who do not get impacted much by the rise in EMIs.
In fact, the outstanding priority sector housing loans of banks from January to June have been just 1-2% higher than during the same months in 2022. When it comes to non-priority housing loans of banks, they have been around 22% higher from January to June in comparison to the same months in 2022.
Further, the percentages don’t explain this inequality well enough. The outstanding priority sector housing loans from June 2022 to June 2023 went up by ₹137.76 billion. In comparison, the non-priority sector housing loans went up by ₹2.47 trillion, nearly 17 times more. To be fair, this anomaly existed even before the Reserve Bank started raising rates, but it has only got worse, primarily because real estate in the formal sector continues to remain very expensive and the fact that prices of high-end real estate have rallied in the last 12-18 months.
Of course, actions of central banks have consequences. Things don’t always work in just one direction. The trouble is that the other direction rarely gets talked about. When RBI and almost every other central bank pushed rates down post-covid, it led to massive bubbles in stocks and cryptos and higher inflation. But there was very little talk about these bubbles in the communications of central banks. Now, as RBI has raised rates, the not-so-well-to-do have been pushed out even further from the housing markets, and there is very little talk about this K-shaped impact. Like the part does not always reflect the whole, the whole also rarely reflects all the parts.
Buying a home in the U.S. often involves weighing the trade-offs between a 15-year and 30-year mortgage. With the interest rate staying constant, the first option has higher monthly payments, but the loan is repaid sooner than it is with the second option that offers lower monthly payments.
But home loan borrowers in the U.K., Canada, Australia and most European countries have a wider array of choices: They can break up their loan tenure into smaller chunks of two, three, or five years, and get lower interest rates as their loan size reduces and credit rating improves over time.
A new research paper by Wharton finance professor Lu Liu, titled “The Demand for Long-Term Mortgage Contracts and the Role of Collateral,” focuses on the U.K. housing market to explain the choices in mortgage fixed-rate lengths by mortgage borrowers. She pointed out that the length over which mortgage rates stay fixed is an important dimension of how households choose their mortgage contracts, but that has “not been studied explicitly thus far.” Her paper aims to fill that gap.
Liu explained that the U.K. market is “an ideal laboratory” for the study for three reasons: It offers borrowers an array of mortgage length choices; it is a large mortgage market with relatively risky mortgage loans similar to the U.S.; and it offers the opportunity to study market pricing of credit risk in mortgages. In the U.S. market, the pricing of credit risk is distorted as the government-backed Fannie Mae and Freddie Mac provide protection against defaults. “The U.S. is a big outlier in mortgage structure. It has essentially removed credit risk in the markets for long-term contracts.”
How Beneficial Are Long-term Mortgages?
At first sight, long-term mortgage contracts may seem preferable because they have a fixed interest rate, and thus allow borrowers to protect themselves from future rate spikes, the paper noted. “Locking in rates for longer protects households from the risk of repricing, in particular having to refinance and reprice when aggregate interest rates have risen,” Liu said. “In order to insure against such risks, risk-averse households should prefer a longer-term mortgage contract to the alternative of rolling over two short-term mortgage contracts, provided that they have the same expected cost.”
But in studying the U.K. housing market, Liu found that there is an opposing force that may lead some households to choose less protection against interest rate risk. This has to do with how the decline of credit risk over time affects the credit spreads borrowers pay. She explained how that occurs: As a loan gets repaid over time, the loan-to-value (LTV) ratio decreases as households repay the loan balance and house prices appreciate, the paper noted. This reduces the credit spread that households pay on their mortgage over time. When high-LTV borrowers decide to lock in their current rate, the credit spread will account for a large portion of that rate.
“[30-year mortgages] have had knock-on effects on mobility and housing markets due to mortgage lock-in.” – Lu Liu
As the LTV ratio declines and collateral coverage improves over time, they raise the opportunity cost of longer-term contracts, in particular for high-LTV borrowers, Liu noted. “Locking in current mortgage rates [protects] households against future repricing, but it also locks in the current credit spread, leading households to miss out on credit spread declines over time.”
High-LTV borrowers, or those who opt for low down payments and bigger loans, have to initially pay large credit spreads that can be as high as 220 basis points higher than what a borrower with prime-grade credit would pay. But refinancing with shorter-term contracts allows them to reduce those credit spreads over time. “They’re not locking in to a rate over 30 years; they’re probably locking in at shorter terms of two, three, or five years, and they do it maybe six or seven times,” Liu said. Riskier borrowers with higher LTV ratios hence face a trade-off, as locking in rates while the LTV is high is relatively costly, so they end up choosing shorter-term contracts, meaning they choose less interest-rate protection than less risky borrowers.
“In markets where the credit risk is priced using market prices – without government intervention as in the U.S. — the credit risk is expensive as lenders charge relatively higher rates for that,” Liu said. “If I’m a risky borrower, I face this very difficult trade-off: I want to insure myself like everyone else. But it also means that I’m locking in relatively high rates, with a big credit spread.” That of course does not always make sense for borrowers, she pointed out. “This may help explain why very long-term mortgage contracts with high-LTV mortgage lending are rare across countries.”
Liu said her data, which covered the period from 2013 to 2017, showed that the propensity is lower among riskier borrowers to opt for a 5-year fixed-rate mortgage compared to a 2-year fixed-rate mortgage. The higher the loan-to-value ratio, the lesser was their incentive to choose longer mortgage tenures, her research found. “Borrowers at 95% LTV are less than half as likely to take out a 5-year fixed-rate contract, compared to borrowers at 70% LTV,” the paper stated. The findings help explain the “reduced and heterogeneous demand for long-term mortgage contracts.”
How to Make U.S. Mortgages More Efficient
Liu said the findings in her paper are relevant for mortgage market design. “High-LTV borrowers face a difficult trade-off between their demand to lock in overall interest rate levels, and an expected decline in credit spreads over time,” she said. “Households could benefit substantially from being able to lock in base interest rates, while repricing their credit spreads.”
The findings are important also from both a monetary policy and financial stability perspective, Liu continued. “High-LTV borrowers are more exposed to interest rate risk, which can also cause vulnerabilities in a rising rate environment, since these borrowers may be most affected by mortgage cost increases.”
“There is political resistance to institutional change and borrower resistance to novel mortgage products.” – Lu Liu
The findings of Liu’s research are also timely, given the recent spike in the inflation rate. She noted that the U.S. Federal Reserve has increased interest rates more aggressively than its counterparts in the U.K., Canada, and Australia. All those countries have varying degrees of short-term fixed or variable-rate mortgages. Unlike in those countries, U.S. mortgage borrowers are “relatively shielded from interest rate rises, as the vast majority of households have locked in previous low rates for 30 years,” she noted.
Unintended Consequences of Long-term Mortgage Contracts
But the design of mortgage contracts in the U.S. creates disruptions beyond the housing markets to the broader financial system. “The 30-year fixed-rate mortgages in the U.S. have led to duration mismatch and financial stability risks in the banking sector, as rate rises have reduced the market values of these loans and mortgage-backed securities,” Liu said. She cited the recent collapse of Silicon Valley Bank as a case in point, which was triggered by the fall in the valuation of its bond holdings in a rising interest rate environment. In the U.K., in contrast, banks typically hedge the 2-to 5-year fixed-rate legs of mortgages using swaps, with the remaining part of the contract having a variable rate and thus not causing duration mismatch for the banks.
Long-term contracts have other consequences, too. “The [30-year mortgages] have had knock-on effects on mobility and housing markets due to mortgage lock-in,” Liu continued. Mortgage lock-in occurs in a rising interest rate environment, where homeowners find it a losing proposition to refinance mortgages they had taken out when interest rates were at historical lows. As a result, “people aren’t moving, and the housing market is frozen,” she said.
Liu said policy makers ought to rethink the 30-year fixed-rate mortgage, noting that Harvard economics professor John Y. Campbell had proposed that in a presentation at the Georgia Tech-Atlanta Fed Household Finance Conference in March 2023.
That said, the nature of mortgage systems in different countries is “highly persistent over time,” so any recommendation to radically change them might be far-fetched, Liu noted. “There is political resistance to institutional change and borrower resistance to novel mortgage products,” she added. If the U.S. were to move in the direction of more of a Canadian system that has mortgage rates fixed for five years, she noted, “any implementation of shorter-term fixed-rate contracts would need to take into account the credit risk dimension, which could result in risky households insuring less against interest rate risk.” Such a move has the potential to make monetary policy more effective and the banking system more stable, but further research is needed, she added.
Famous for its beautiful beaches, lively atmosphere and, as of late, bustling real estate activity, Tampa is clearly a city on the rise. If you’re considering making a move to or investing in the Sunshine State, the Tampa housing market should definitely be on your radar. From median home prices skyrocketing to environmental concerns, there’s much to discuss. Let’s dive into the somewhat murky waters of the Tampa housing market, shall we?
Critical trends in the Tampa housing market
Tampa is becoming a magnet for homebuyers and investors alike. As the city’s popularity continues its upward trajectory, several key trends in the housing market have emerged, shaping the future of Tampa real estate.
Soaring home values and quick sales
Let’s talk turkey, and by that we mean pricing. The median sale price of a home in Tampa has soared to a jaw-dropping $460,000. To give that some context, that’s a 21.1% hike from just a year ago. But it’s not just the overall price; the price per square foot is also showing a robust upward trend. Currently, it sits at $285, up 9.6% year-over-year.
What about how fast homes are selling in the Tampa housing market? Let’s put it this way: if Tampa homes were marathon runners, they’d be close to setting world records. On average, a home in Tampa will receive about three offers and take around 20 days to sell. That’s a touch slower than the 18-day average from last year, but by no means sluggish.
Current inventory in Tampa’s real estate market
In August 2023, the Tampa housing market saw the sale of 609 homes. This might seem like a busy month, but it’s slightly down from 626 homes sold in August of the previous year. Whether this slight drop is an anomaly or a signal of things slowing down is yet to be seen. We’ll keep you updated on the Tampa housing supply as time passes.
Migration trends to and from the Tampa area
From beach bums to young professionals fresh out of college to newly minted retirees looking to lay down roots one last time, people are making their way to Tampa in droves. And with good reason.
The appeal of the Tampa housing market
The Tampa housing market isn’t just pulling Floridians; it’s drawing interest from other metro areas as well. Specifically, house hunters from New York, Washington and Chicago are paying special attention to Tampa. This accounts for 2% of total homebuyer interest, and given the size of the national market, that’s significant.
Staying local vs. moving out
While Tampa is attracting outsiders, many residents are choosing to stay put. From June to August 2023, 69% of Tampa homebuyers were looking to stay within the Tampa metropolitan area. However, the wanderlust still exists for a good chunk (31%) of the population, who are exploring greener pastures in Sarasota, FL, Orlando and even Asheville.
Tampa real estate market risks
Like all housing markets, Tampa’s comes with its fair share of risks. While Florida may be known for year-round stellar weather, coastal winds, heavy rains and heat damage are always on the table in The Sunshine State.
Environmental concerns
Life’s a beach until you have to consider natural hazards, right? The Tampa housing market isn’t exempt from environmental risks. According to data from the First Street Foundation:
Flood: A whopping 43% of properties have extreme flood risks over the next 30 years.
Fire: Only about 15% of properties are at wildfire risk.
Wind: Hold on to your hats; 100% of properties in Tampa are at risk for severe wind events.
Heat: Almost every property — 99% — faces an extreme heat risk.
Transportation compared to national average
When considering a move, commute and accessibility are vital. In terms of walkability, Tampa has room for improvement, scoring 50 out of 100. Public transport isn’t Tampa’s strong suit either, with a score of 31. However, if you’re a cycling enthusiast, rejoice! Tampa scores a 55 in bikeability.
Concluding thoughts on the Tampa housing market
The Tampa housing market is a blend of rapid growth, diverse buyer interest and environmental risks. Prices are soaring, and homes are selling fast. It’s a market that demands swift decision-making, but also due diligence, especially when it comes to natural hazards.
From local residents switching neighborhoods to out-of-staters seeking sunnier days, Tampa’s allure is undeniable. Whether you’re a buyer, a seller or an investor, understanding these complexities will stand you in good stead in navigating the ever-changing Tampa housing market.
Tampa rental market
Switching gears, let’s examine another vital aspect of the Tampa housing market, rentals. With the surge in home prices, many people are instead settling down in apartments, albeit at increasing costs. The Tampa rental market has seen its own set of fluctuations:
The average rent for apartments in Tampa oscillates between $1,667 and $1,910, depending on the number of bedrooms you need.
Rental price ranges
If you’re wondering about the range of price in rents, here’s how it looks:
Less than $1,000: Around 5% of apartments fall within this bracket.
$1,001-$1,500: About 10% of apartments lie here.
$1,501-$2,100: This is where 32% of apartments are priced.
Above $2,100: A surprisingly large proportion, 53%, fall in this high-rent category.
Neighborhood trends in the Tampa rental market
Different neighborhoods, naturally, command varying rents. While Northwest Tampa saw a dramatic 49% increase in average studio rents to $1,875, areas like Channel District, Harbour Island and Southeast Tampa have seen decreases, ranging from 4% to 5%. On the more affordable end, North Tampa, Terrace Park and Lowry Park North offer one-bedroom apartments for around $1,250 to $1,295 on average.
For those seeking luxury, the Hyde Park Historic District and Harbour Island top the list, with one-bedroom apartments renting on average for more than $2,600. Popular neighborhoods like South Seminole Heights and Tampa Heights offer one-bedroom apartments for averages of $1,500 and $1,300, respectively.
How Tampa rent compares to other cities
For a broader perspective, let’s compare Tampa to other nearby cities. In Tarpon Springs, a studio will cost you around $2,100. Saint Petersburg has seen a 7% increase in one-bedroom rentals, now at $1,954. Sarasota, on the other hand, has seen a 3% decrease in rental prices, now at an average of $1,600 for a one-bedroom apartment.
Final thoughts on the Tampa rental market
Whether you’re buying or renting, the Tampa housing market is a hotbed of activity, with tons of opportunities and challenges. Rising rents reflect the growing demand and low supply, much like the situation in the home-buying market. Neighborhoods offer a range of options, from the affordable to the luxurious, each with its own set of pros and cons.
In summary, understanding the intricacies of the buying and rental markets in Tampa is essential for making an informed decision. After all, whether you’re settling down permanently or just passing through, the Tampa housing market has something for everyone, at every price point.
So, come for the sunshine, stay for the lifestyle — just make sure you’re well-prepared for the financial journey that lies ahead. Your dream place in Tampa is just a few clicks away.
Rent prices are based on an average from Rent.’s multifamily rental property inventory as of July 2023.
Other demographic data comes from the U.S. Census Bureau.
The rent information included in this article is used for illustrative purposes only. The data contained herein do not constitute financial advice or a pricing guarantee for any apartment.
As home affordability decreased, sellers reduced asking prices more frequentlythis September, with the pace coming in above typical seasonal patterns.
Approximately 6.5% of homes on the market saw asking prices reduced during the four-week period ending Sept. 27, according to new research from Redfin. The rate corresponds to approximately one in 15 properties on the market and represents an increase from 5.8% a month earlier. That is a sharp rise from what has been reported in past years over the same time frame, the real estate brokerage said.
The uptick in price cuts comes as low inventory and rising interest rates take a bite out of affordability, according to several recent reports. Conditions contributing to the current state of the market appear set to continue leaving their mark on affordability over the next several months, leading analysts said at this week’s Digital Mortgage conference in Las Vegas.
Redfin found the median sales price rose 3.1% year-over-year, coming in at $372,500, even with “relatively low” demand. A recent rise in the volume of new listings, also atypical for the time of year, is giving home shoppers more leverage.
“Buyers are using things like inspection negotiations and high insurance premiums to back out of deals,” said Heather Kruayai, a Redfin agent in Jacksonville, Florida, in a press release. “They’re holding a lot of the cards; today’s sellers need to concede on some details to close the deal.”
The latest affordability data from the Mortgage Bankers Association offers few signs of improvement for aspiring homeowners. In its monthly purchase-applications payment index released this week, the trade group reported the average monthly amount applied for by new home buyers increasing by a fraction to $2,170 in August, from $2,162 in both June and July. The current figure is higher by 18% compared to the mean level of a year ago — $1,839.
“Prospective homebuyers’ budgets continue to be impacted by the combination of high home prices and mortgage rates that remain higher than 7%,” said Edward Seiler, MBA’s associate vice president, housing economics, and executive director, Research Institute for Housing America.
The latest PAPI report does not factor in September’s surge in mortgage rates, with the 30-year conforming average landing at 7.41% at the end of last week among MBA members — the highest point since late 2000. Similarly, Freddie Mac reported a consistent rise in the 30-year rate throughout September after a pullback in August.
Within individual segments, borrowers of Federal Housing Administration-backed mortgages saw their average payment hit a record of $1,901, jumping 2.5% from $1,854 in July and 29.4% from $1,469 in August 2022.
But even with the overall PAPI increase, conventional-loan borrowers saw a fall in the mean to $2,187 from $2,197 between July and August. But the number was still well above $1,901 a year ago.
The MBA’s national payments index for new purchase applications inched up 0.4% to a reading of 175.4 in August compared to 174.7 a month earlier. An increase in the number reflects declining affordability. Strong income earnings of over 4% over the past 12 months helped offset the steep climb upward in payment amounts.
The states showing the smallest degree of affordability were concentrated in the Western U.S., according to the MBA. Idaho led the country with a PAPI score of 269.6, followed by Nevada and Arizona at 265.7 and 238.6.
LAS VEGAS – With mortgage rates headed to 8%, the current housing slump is unlikely to reverse course until 2025, due to the Federal Reserve’s continued ratcheting up of interest rates, mortgage experts said at a conference in Las Vegas.
Analysts continue to warn about overcapacity in the industry with too many lenders and employees to support current origination volumes.
Federal Reserve Chair Jerome Powell signaled last week that interest rates need to stay higher for longer to tame inflation and that it could raise interest rates once more this year. The Fed’s policies have hit potential homebuyers the hardest as mortgage rates approach their highest levels in 23 years, analysts said.
“If the Fed keeps rates where they are today, then I think you’re going to easily see 8% mortgages because the survivors in the mortgage market — once we get rid of another 50% of capacity — are going to want to make money and that’s how they’re going to do it,” said Christopher Whalen, chairman of Whalen Global Advisors, on Tuesday at the National Mortgage News Digital Mortgage conference in Las Vegas.
Whalen was joined by Mark Calabria, a senior advisor at the Cato Institute and the former director of the Federal Housing Finance Agency, in a debate about current public policy and its effect on the mortgage market.
Calabria said the main obstacle to buying a home is finding a house that is affordable. He questioned the Biden administration’s public policy approach, which is focused primarily on providing access to credit to low and moderate-income communities at a time when mortgage rates are above 7% and home prices are still rising due to a lack of inventory.
“There’s just too much tension in Washington where the sense is that we’re going to make the mortgage market and mortgage policy the answer to all these other unrelated things which are real — there are very real social injustices we should fix — but the mortgage market is not the solution for all of them,” Calabria said. “I worry that mortgage policy is bearing the weight of trying to fix a number of things that really have very little to do with the mortgage markets.”
Calabria, the author of “Shelter from the Storm: How a COVID mortgage meltdown was averted,” described how he resisted repeated calls for a bailout of mortgage servicers early in the pandemic. The Federal Reserve had stepped in with a broad array of actions including lowering interest rates, sparking a massive refinance boom in 2020 and 2021. Calabria then applied an adverse market fee to refinances but exempted lower-income borrowers.
Julian Hebron, founder of the Basis Point, a consulting firm, and veteran mortgage executive, questioned whether the FHFA should be setting pricing in the mortgage market and asked whether it’s “appropriate for GSEs to raise fees to build capital to prepare for downturns.”
Calabria said the government-sponsored enterprises should be charging so-called g-fees for guaranteeing the timely payment of principal and interest on mortgage-backed securities because doing so covers projected credit losses from borrower defaults over the life of a loan.
“Ultimately, I don’t think the regulator should be driving prices,” Calabria said.
He also said Fannie Mae and Freddie Mac will remain in conservatorship for the foreseeable future but also envisions a way out of government control — by having the GSEs raise fees.
“If you’re a CEO of one of these companies, it sucks being micromanaged, and I know that as somebody who micromanaged the CEOs,” he said. “If I was the CEO of one of these companies and I had the freedom to do it, I would jack up G-fees so I can build capital and get out two or three years earlier than I would otherwise. Because again, it sucks being in conservatorship for these companies, at least at the top.”
Calabria took office in 2019 and sought to end government control over Fannie Mae and Freddie Mac, which guarantee 70% of the roughly $12 trillion U.S. mortgage market. Though Calabria was confirmed by the Senate to a five-year term, he was fired in 2021 by President Biden following a Supreme Court ruling. Biden named Sandra Thompson as Calabria’s successor.
Whalen laid the blame for the current high interest rate environment squarely on the Fed and its actions in dropping rates in response to the pandemic. Roughly 90% of homeowners currently are locked in to mortgage rates below 6% and many are paying less than 4% on loans that were refinanced when the Fed held interest rates near zero. As a result, homeowners are not selling their properties, resulting in record-low inventory and a general gumming up of the mortgage market in a high-rate environment.
“The trouble is that the Fed’s actions through COVID distortéd the market so much that lenders are losing 200 to 250 basis points on every loan they make,” said Whalen. “Even though the agencies and the FHA subsidize the cost of mortgages, that’s really what they do, it’s not about getting a mortgage, it’s about how much does it cost every month, which goes across every product in America.”
Many forecasts that are well-founded in data have been upended by major events, such as COVID or a bank failure. Whalen said that the only way mortgage rates could get down to 6% or 6.5% in the near-term is if there is another bank failure.
“If we see another surprise in the banking market, the Fed is going to be forced to back off,” said Whalen, adding that he is concerned that interest rates are making asset prices go down. “If we see another failure, they are going to probably have to turn to the Treasury for support or tax the industry to raise cash because there won’t be three or four buyers out in the room.”