The days of the 3% rates have passed, but there could be some positive news
This is not your father’s inflation but a new generation of economic uncertainty. And with it comes a new set of tactics by the Fed that many hope will help bring mortgage rates down.
The Fed’s 16-month campaign to fight inflation by raising interest rates has had the desired effect in tamping it down to slightly above 3% from a 40-year high of 9.1% in June 2022. But sometimes the Fed’s actions come at breakneck speed, prompting more anxiety among those whose livelihoods rest largely on rate levels – think mortgage brokers and loan originators, for instance.
Back in the day, the Fed would typically wait to see the effect of a rate hike before implementing another. But in today’s world, virtually every increase has been baked in. The Fed started raising rates from near-zero in March 2022, ramping them up last year before adjusting them at a slower pace this year. After a pause in June, policymakers raised the rate this month for the 11th time.
There’s a method to the madness
“For better or worse, some of what we’ve seen has sort of defied historical patterns,” Sarah Alvarez, (pictured), vice president of mortgage banking at William Raveis Mortgage, told Mortgage Professional America in a recent interview. “In some ways, they [the Federal Reserve] are fighting a beast that may be a little less predictable than it has been in the past. At the end of the day, this is the story of the Fed’s work, but we also have these macroeconomic factors.”
Take the Russia-Ukraine grain deal, for example. Agreed to a year ago in Istanbul after being brokered by Turkey and the United Nations, Russia has pulled out of the pact as it engages in war with Ukraine. The aim of the deal was to release Ukrainian grain across the global market toward stopping the rise of food prices.
“All these things can have a pretty significant effect in terms of food prices,” Alvarez said. “It possibly speaks to how interconnected the economy is globally and how there are just so many influences that can sort of change the narrative.”
And let’s not forget the scourge of COVID-19. While the peak of its wrath has substantively subsided, its after-effects are still being felt, Alvarez suggested. “Of course, having COVID and that situation that was so unique and so drastic in terms of the changes that brought along in such a short time,” she said, “whether they’re right or wrong, the Fed is acting on the belief that they needed to act very quickly in order to counteract what was a very drastic and fast change.”
Has a recession been averted?
Some prognosticators – from armchair pundits to venerable news sources – have been predicting a hard recession for a while. But in this changed environment, reliance on old economic models may have come too soon for those predicting such an economic malaise.
“I spend a lot of time reading about this, and it depends on what you’re reading on what day,” Alvarez joked. “It seems we’ll potentially be able to avoid a much larger-scale recession but at the end of the day there are many people, many Americans, who can definitely say they are feeling the significant impact of these raises.”
Recession or not, the effect may feel the same for many: “It’s such a drastic shift from the sentiment and feeling during COVID,” Alvarez said. “People had extra money and were putting some away for savings. Credit card debt is skyrocketing right now. There probably is more pain in front of us but I do hope and remain optimistic that the severity of it will not be so extreme that it will fall into the specific recession category.”
Lower mortgage rates expected by year’s end
In this topsy-turvy, post-COVID world in which we live, one of the biggest transformations has come in the housing industry. In response to the pandemic and attendant lockdowns, the 30-year fixed mortgage rate dropped under 3% for the first time since 1971. In January 2021, the new record low interest rate was just 2.65%. Historically low mortgage rates of 3% or lower lasted from around July 2020 to November 2022 – a far cry from the average of 7% over the past 50 years when Freddie Mac first began to survey mortgage lenders.
Read this article to know do mortgage rates go down in a recession.
The landscape is markedly different today. “You would think this higher rate market would have a much higher, significant impact in terms of the cost of housing, but overall, we haven’t really seen prices come down that significantly,” Alvarez said, while adding that some markets have experienced corrections. “The other thing we’ve been talking about a lot is just how you ‘marry the house and you date the rate.’ But right now, there are some people who say ‘love the loan, but stuck in the home.’ Because if you got financing during COVID, what you might be able to afford is significantly different without the pricing changing too much.”
After such a sober discussion on the travails of the times, she offered a note of hope: “Hopefully, we will see rates down by the end of the year,” she said. “The general market industry predictions are that they will be hopefully in the low 6s to high 5s by the end of the year and continue a downward trend.”
But one thing is certain: We’ll likely never go back to mortgage rates in the 2s and 3s. “You have to view that as a reflection of what was happening in the world at the time,” she said. “I don’t think anybody necessarily wants to go back to that. For better or for worse, having this 7% market and all of a sudden when you’re looking and get offered a 6% or 5% is much more appealing. So in some ways, it’s helpful to have that perspective, because when we’re moving from 3% to the 6% that was not a happy place for the consumer. But with more understanding and context, people can be a little bit happier with somewhat elevated rates but lower than where they are today.”
In other words, disabuse yourself now of the notion of ever having a 3% rate again. But then again – and now more than ever – how could we possibly know what the future holds?
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