The housing market correction takes an unexpected turn – Fortune | Omd Cialis

The Federal Reserve has a simple anti-inflation playbook. Here’s how it works: Continue to put upward pressure on interest rates until business and consumer spending weakens across the economy and inflation falls.

Historically, the Fed’s anti-inflation policy has always hit the US housing market particularly hard. When it comes to home transactions, monthly payments are everything. And when mortgage rates go up — which happens when the Fed caters to inflation — those payments go up for new borrowers. That explains why the housing market went into a housing slowdown as soon as mortgage rates rose this spring.

But this apartment correction could lose soon some Steam.

Mortgage rates have fallen rapidly over the past week. On Tuesday, the average interest rate for 30-year fixed-rate mortgages was 5.05%, lower than in June, when mortgage rates peaked at 6.28%. These falling mortgage rates are bringing instant relief to marginalized homebuyers. If a borrower took out a $500,000 mortgage at a 6.28% interest rate in June, they would be paying $3,088 a month in principal and interest. At an interest rate of 5.05%, that payment would only be $2,699. That’s a savings of $140,000 over the 30-year loan.

What’s happening? As weaker economic data rolls in, financial markets are pricing in a 2023 recession. This puts pressure on mortgage rates.

“The bond market is pricing in a high probability of a recession next year and that the downturn will prompt the Fed to reverse course and cut [Federal Funds] Interest rates,” says Mark Zandi, chief economist at Moody’s Analytics wealth.

Although the Fed does not set mortgage rates directly, its policies affect how financial markets evaluate both the 10-year Treasury yield and mortgage rates. Financial markets are raising both 10-year government bond yields and mortgage rates in anticipation of rising interest rates and tightening monetary policy. Financial markets are pricing both 10-year Treasury yields and mortgage rates down in anticipation of a cut in interest rates and monetary easing. We are now seeing the latter in the financial markets.

As mortgage rates rose earlier this year, Millions of Americans lost their mortgage eligibility. However, as mortgage rates begin to fall, millions of Americans are regaining access to mortgages. This is why so many real estate professionals are cheering lower mortgage rates: They should help increase homebuying activity.

While lower mortgage rates will undoubtedly result in more sideline buyers returning to open houses, don’t mark the end of the real estate correction just yet.

“The bottom line is that the recent drop in mortgage rates will help marginally, but the housing market will remain under pressure with mortgage rates at 5% (fewer sales, slower home price growth),” wrote Bill McBride, author of the book Economics blog Calculated Risk, in his Tuesday -Newsletter. The reason? Even with the one percentage point drop in mortgage rates, housing affordability remains historically low.

“If we factor in the rise in home prices, payments for the same home are up more than 50% year over year,” writes McBride.

There’s another reason housing bulls shouldn’t get too cocky: If recession fears – which are helping to lower mortgage rates – are correct, it would result in further weakness in the sector. If someone is afraid of losing their job, they will not jump into the housing market.

“While lower interest rates are inherently positive for housing, when they are accompanied by a recession and rapidly rising unemployment, this is not the case,” says Zandi wealth.

Where will mortgage rates go from here?

Bank of America researchers believe the 10-year Treasury yield could fall from 2.7% to 2.0% over the next 12 months. This could bring mortgage rates down to 4% to 4.5%. (The development of mortgage interest rates correlates closely with the development of the 10-year Treasury yield.)

But there is one big wild card: the Federal Reserve.

The Fed clearly wants to slow down the real estate market. The pandemic housing boom — during which house prices surged 42% and housing construction hit a 16-year high — was one of the drivers of skyrocketing inflation. Reduced home sales and a slump in home construction should ease the strained US housing supply. We’re already seeing it: declining housing starts are leading to lower demand for everything from framing lumber to cabinets to windows.

But if mortgage rates fall too quickly, a recovering housing market could mess up the Fed’s inflation fight. If that happens, the Fed will have more than enough monetary “firepower” to put further pressure on mortgage rates.

“Whether or not we’re technically in a recession doesn’t change my analysis. My focus is on the inflation data… And so far, inflation continues to surprise us on the upside,” Minneapolis Federal Reserve Bank President Neel Kashkari told CBS on Sunday. “We are committed to bringing inflation down and we will do what we have to do.”

Want to stay up to date on the housing recession? Follow me on Twitter at @NewsLambert.

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