Don't expect rates to go down anytime soon
In times of market uncertainty, one yearns to reach out to a seasoned veteran for insight and outlook – not just anyone but someone with institutional knowledge and, if it’s not too much to ask, with a mix of private and public sector experience in the housing industry.
Mortgage Professional America turned to Steve Pawlowski (pictured) for his take on current mortgage market madness, benefiting insights gleaned from a three-decade stint at Fannie Mae and his work now in the private sector as head of technology solutions at Mortgage Capital Trading Inc. (MCT).
“You’ve seen the 10-year pop up, hitting its peak as far as ten-year Treasury yields and mortgages have broken through 7% and are kind of hovering above that the last several months,” he said during a telephone interview. “And then on the flip side of that, they don’t have a lot of housing inventory. Housing prices have remained either elevated or pretty consistent. So you know you have higher interest rates, you’ve got little supply, and affordability is getting squeezed.”
Lenders are feeling the pinch too: “Also, what’s happening is your lenders are also trying to struggle through the fact that volumes are way down.”
So what should we expect?
All this we know, with the factors leading to higher rates by now well documented. But to glean some optimism from this mix is something different, particularly coming from someone who’s been in the thick of it. “However, we’ve seen some mixed messages or information come out,” he said. “You’ve seen signs of inflation slowing down, the labor market cooling so there’s some optimism in the marketplace,” he said.
To be sure, the Fed has succeeded in bringing the inflation rate down through an aggressive raising of interest rates. The US inflation rate stands at 3.67% -- up from 3.18% last month but considerably down from the 8.26% level reached last year, as YCharts has tracked. The current rate is higher than the long-term average of 3.28%. The Fed’s goal of bringing inflation down to 2% has remained elusive.
Stated simply, the US inflation rate is the percentage in which a basket of goods and services purchased in the US increased in price over a year. It’s a key gauge by which the Fed determines the health of the economy. At least rates-wise, take comfort we’re past the early 1980s iteration of inflation when rates rose as high as 14.93%.
But back to now: “The Federal Reserve hopefully will pause rates,” Pawlowski said. I don’t see them reducing rates or doing any kind of easing anytime soon; I probably would expect that to occur towards the middle of next year or the end of next year. But, I think if the Fed gets off the increased rates and gets more consistent data coming through – because right now with the mixed bag of data, the Fed still has a green light to raise rates – you can get to a place where they will pause that stance and I think you can see rates start to come back down.”
Are lower rates imminent? “I don’t think they’re going to get down to the 6% range or 5% range, but they could get somewhere in the trading range between 6.5% and 7%, which I think would help alleviate some of the concerns in the marketplace. But there’s still a housing supply issue they need to overcome.”
Those who have tried to borrow money already know what may be an abstraction to some, yet risk aversion is real: “Anytime you see a market where it’s getting more costly to borrow, whether it’s from the borrower perspective or a lender’s perspective, I think you start to see some [change in] approach in how people view risk,” Pawlowski said. “I think this is where the GSEs serve the market really well because they’re managing within their credit box and they’re there to help serve our lenders and borrowers in the marketplace.”
Be glad it’s not another Great Recession
There are some comparing today’s crisis as reminiscent of the Great Recession. Hearing Pawlowski describe the two scenarios is to effectively disabuse of the notion.
“The Great Recession was an overheated market from a volume and risk perspective,” he said. “You saw the type of risk where there were many layers to it. What you’ve seen since the Great Recession is a much more stringent approach to how we view credit, and manage credit, and how we qualify borrowers around sustainability. What you’re seeing in this kind of crisis is less of the risk overlays. What you’re really contending with is not so much the risk aspect of it as it is that you’ve got affordability supply concerns and the higher rates. People are still managing within their credit box or risk appetite. Of course, you’ve got the non-QM space, but of course they’re managing to a certain risk bucket as well.”
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