The housing market correction will be deep and ugly

HW + housing crash

Do you think things are bad in the housing market now? Keep looking to see if mortgage rates go up to the 7% range.

If that happens, the current start-up forecast of $2.2 trillion in 2023 will look very rosy. Even the most battle-tested industry players are bracing for one of the strongest housing market corrections in decades.

Federal Reserve Chairman Jerome Powell sent a clear message during a press conference following the announcement of the central bank’s decision to raise the federal funds rate by 1 75 basis points Wednesday: The ongoing correction in the housing market, which led to the largest increase in mortgage rates in four decades, is far from over.

Mortgage-backed securities are right in the worst place in the duration spectrum for the move. Freddy’s weekly poll is hopelessly low today – actual 30-year flat rates are over 6.5% now.

Matt Graham, CEO of MBS Live

“Builders are having a hard time finding a lot of workers and materials,” Powell said. “In the long run, what we need is supply and demand to align better, so house prices are rising at a reasonable pace and people can buy homes. Maybe the housing market needs a correction to get to that place.”

So far, monetary tightening has pushed the 30-year fixed-rate mortgage rate to 6.29% this week, up 27 basis points from the previous week. Freddy Mac Thursday’s Preliminary Mortgage Market Survey (PMMS) showed. A year ago at this time, average rates were 2.86%.

“The housing market continues to face headwinds with mortgage rates increasing again this week, after the 10-year Treasury yield jumped to its highest level since 2011,” Sam Khater, chief economist at Freddy Mac, said in a statement. “Affected by the higher rates, home prices are going down, and home sales have gone down. However, the number of homes for sale is still well below normal levels.”

Some market watchers were hoping to see Powell express some willingness to ease the tightening. These observers were based solely on the expectation that current policies would have the effect needed to bring inflation closer to the 2% target, according to Matt Graham, founder and chief executive officer at MBS Live.

“But the most important takeaway from the mortgage industry is that Powell has remained absolutely steadfast in his commitment to raise interest rates as much as it takes to tackle inflation,” Graham said. “Between noon yesterday and today, the entire financial market is in the throes of adjusting to this new reality. Mortgage-backed securities are right in the worst place in the term spectrum for this move. Freddie’s weekly poll is hopelessly low today — actual 30-year rates are much higher than 6.5% now.”

My guess is that traditional lenders will likely charge points to stay in the top 6s or pay back to the 7s now.

Blake Bianchi, CEO of Future Mortgage

Where did the “patch” come from?

The Freddie Mac Index only aggregates the mortgage purchase rates reported by lenders over the past three days. However, other estimates show the rates are even higher.

The 30-year fixed-rate mortgage was 6.62% Thursday afternoon, up 20 basis points over the previous day. Daily Mortgage News mentioned.

according to Bankrate.comWith surveys from the 10 largest banks, initial mortgage rates are currently hovering around 6.4%. Prices are up more than 300 basis points year on year, the largest 12-month overdue increase since the early 1980s, according to analysts from the investment banking firm. Keefe and Pruitt Woods wrote in a report on Wednesday.

“This creates a very challenging environment for scale-sensitive companies such as mortgage originators and property insurers,” the analysts said. “Given the magnitude of the price action, we believe there may be a downside to current estimates of industry volumes in 2023.”

Fannie MaeThe latest forecast, published this week, puts total mortgage creation activity at $2.44 trillion in 2022 and $2.17 trillion in 2023.

Owners may be cooped up in their current homes with mortgage rates soaring, and rates of 3% from last year may not return any time soon.

Nadia Evangelo, Economist at NAR

With rates at that level, the entire mortgage market is 150-200 basis points (or more) of funds to refinance, KBW analysts said. In addition, buying activity has also decreased substantially in recent weeks. The Mortgage Bankers Association The buying index is currently 21% below 2021 levels and 26% below 2019 levels.

To understand the impact on borrowers, an increase in mortgage rates this week to 6.29% resulted in a monthly payment of a $400,000 loan of about $2,470, compared to $1,660 a year ago, according to Nadia Evangelo, National Association of Realtors The chief economist and forecasting director said in a statement.

Owners may be cooped up in their current homes with mortgage rates soaring, and rates of 3% from last year may not return any time soon. While the nation is experiencing a severe housing shortage, reduced mobility could tighten the housing stock and cause housing prices to continue to rise.”

However, a median home is worth about $80,000 more than it was in 2020 and $200,000 more than in 2012.” Thus, having positive equity in an individual’s home may mitigate the effects of higher mortgage rates on Mobility.”

Where is the housing market headed?

Looking ahead, loan officials are beginning to project mortgage rates at the 7% level, a sign that the housing market correction will bring greater affordability challenges in the coming year.

A few years of 5-7% mortgage interest rates will be good for the economy, great for buyers, as demand gets less crazy and more sustainable in the long run.

Shaun Grappen, UMortgage Branch Manager

“After the Fed raised rates yesterday, we now see the 10-year Treasury rise at 3.697%. Blake Bianchi, founder and CEO at Boise-based brokerage, said future mortgage. “Mortgage brokers like us are probably in the average low 6s in a prime home.”

In the current landscape, price-shopping is more important than ever, Bianchi said, as saving half a percent or not paying any points can financially impact buyers in this market. “The good news is that we see that it leads to lower prices, so buyers can get a home at a better price, with less competition and hope to refinance later to improve their loan position,” he said.

Shaun Griffin, Branch Manager, Inc. UMortgage From Atlanta, he said the Federal Reserve’s decision on Wednesday to raise interest rates by 50 to 75 basis points over the past two weeks, which is not entirely bad for the housing market.

“The Fed rate hike is causing some temporary pain as people adjust to the differences, but a few years from 5-7% mortgage rates are going to be good for the economy, great for buyers, as demand gets less crazy, and more sustainable in the long run. .

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