Is the plus-5% mortgage rate environment here to stay?

Long-term trends suggest recent years have been something of an anomaly

Is the plus-5% mortgage rate environment here to stay?

Much has been made in recent months of surging US interest rates, with higher borrowing costs helping significantly cool the housing and mortgage markets – but should mortgage shoppers view that trend in a longer-term context?

At time of writing, the 30-year fixed rate mortgage average in the US hovered around 6.90%, up dramatically from the height of the COVID-19 pandemic when the Fed slashed its funds rate and mortgage rates tumbled.

While that average rate has spiked over the last two years, its current level appears somewhat less remarkable when compared with that of the past half-century, when it has rarely dipped below 5% other than during times of financial crisis or economic upheaval.

Kevin Leibowitz (pictured top), chief executive officer and co-founder at the Brooklyn-headquartered Grayton Mortgage Inc., told Mortgage Professional America that with the last decade and a half having witnessed a series of unusual events, the sub-5% rate environment that has prevailed shouldn’t be viewed as normal or regular.

“Essentially for 50 years, we haven’t been below 5%, save after the [2007-08] financial crisis,” he said. “We’ve had these very strange circumstances: we had that [crash], which was not normal. Then we had Brexit, which was not normal, and then we had COVID, which was also not normal.

“So we’ve had these three events in the last 15 years that kind of kept the ceiling at 5%. If you look at that period from 2008 to 2022, I’m calling that ‘Interest Rate Never Never Land’: we won’t see that again.”

Homebuyers hold out hope for return to low-rate environment

Plummeting interest rates at the height of the pandemic helped spark a housing market boom as scores of homebuyers rushed to take advantage of dramatically slashed borrowing costs.

The rate spike that’s transpired since then has seen many would-be buyers step to the sidelines, possibly in the expectation that rates will eventually dip below 5% again and they can re-enter the market at an ideal time – but for Leibowitz, that’s a misguided approach.

“We get with first-time homebuyers this incredible fear of missing out, and we can’t recreate and re-present environments that are no longer here,” he explained. “I tell my clients. It’s like the price of gold. Gold used to be $300 an ounce – well, now it’s $2,000 an ounce.

“I can’t go back and buy it at $300, nor can I present a 5% interest rate option to you. What do you want to do now in the current environment?”

The graph illustrating long-term US mortgage rate trends, Leibowitz said, offers an illustration of how lucky homebuyers have been for the last 15 years due to that unexpected series of events.

“It doesn’t help my first-time homebuyers but if you put it into context, if you look at where we are now, we’re still better than we were in the 1980s and 1990s for the most part and basically in the same environment that we were for the entire period leading up to the global financial crisis, which was a very robust time,” he said.

Is it time for borrowers to get used to the current rate environment?

Housing supply will remain much more of a challenge than it was in prior decades, he said, with little indication that the US’s sluggish pace of construction or new listings will pick up imminently.

Still, longer-term trends help place the current market in a wider context, he argued, dispelling the notion that interest rates higher than 5% are a cause for concern or panic.

“It encapsulates where we are, where we’ve been and where we’re headed,” he said, “and I just don’t see much argument on how we’re going to get below that 5% line again for the 30-year mortgage."

While rates may not slide as strongly as at the beginning of the pandemic, Leibowitz said the Federal Reserve’s recent signaling that cuts are imminent has proven good news for borrowers and helped instil some much-needed optimism into the market.

“The Fed seem to have indicated that they’re done raising rates, which I think is changing the tone and consumer sentiment,” he said. “It’s kind of taking a bit of the fear out of our buyers.”

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