Even if Federal Reserve Chairman Jerome Powell and his colleagues stopped raising interest rates soon, the 30-year fixed mortgage rate would still climb to 10%, according to Christopher Whalen, chairman of Whalen Global Advisors.
That’s because the sharp pace of the Fed’s rate hikes in 2022 is taking some time to trickle back into mortgage rates, especially since the Fed rate already jumped to the 3-3.25% range in late September, from near zero a year ago.
“Lenders are just slowly adjusting their rates,” Whalen told MarketWatch. “They’re not used to rates moving that quickly, and typically they would only change rates once a month or once every two months.”
Borrowers pay a premium above risk-free Treasury rates on mortgages to help account for default risks. 30-year Treasury rate TMUBMUSD30Y,
rose to 4.213% on Thursday, the most since 2011, according to Dow Jones Market data.
Freddie Mac said in its latest weekly survey on Thursday that the 30-year mortgage rate averaged 6.94%, a 20-year high that has sharply dampened demand for new home loans.
But with U.S. inflation showing no clear signs of coming down from a 40-year high, the Fed’s expectations that it will raise its policy rate by another 75 basis points at its November meeting, and potentially by the same amount again in December. , according to the CME FedWatch tool.
The CME rate on Thursday favored a rate of 4.75% – 5% Fed-funds rate for the beginning of February.
“Mortgages have a lagged effect,” Whalen said, adding that even if central bankers decided to hold off on further rate hikes after the December meeting, the 30-year mortgage rate would “easily touch 10% by February.
Whalen, an investment banker, author and specialist in banking and mortgage finance, urged the U.S. Securities and Exchange Commission in 2008 to move complex and opaque derivatives “back into the light of day” after banks and investors saw losses in hundreds of billions of dollars. tied to structured debt, including subprime mortgages. He also testified to Congress in 2009 on the systemic risks of the banking sector.
Now Whalen sees another big shake-up in mortgage banking as profitability continues to shrink (see chart) and the housing market sputters.
Importantly, Whalen also sees the potential for home prices to give back any gains from the pandemic if rates remain high through 2023.
That’s a bigger ask than estimates after a 10%-15% correction in home prices from prices that rose 45% nationally during the pandemic.
But Whalen pointed to speculative home flipping volumes reaching nearly $150 billion, or 10% of total home sales in 2022, and the cold blanket of double-digit mortgage rates as catalysts for a steeper decline in home prices.
In a note to clients on Thursday, economists at Mizuho Securities pegged median home sales prices at 2.5% below their highs and characterized the housing market as “deteriorating” but mostly in line with expectations given the sharp jump in mortgage rates.
Mortgage rates can be traced directly to the market for mortgage-backed securities, or MBS, which are Wall Street-traded, mostly government-backed bonds that finance most of the nearly $13 trillion U.S. mortgage debt market.
The Fed’s rate-hiking race has rattled financial markets, sinking stocks and leading to a sharp drop in mortgage-backed bond issuance this year, while making it more expensive for corporations, municipalities and households to borrow as part of its fight against inflation.
“It’s going to take months for us to get the bond market and the loan market back in sync so people can start making money again,” Whalen said.
Stocks closed lower for a second straight day on Thursday, leaving the S&P 500 SPX,
23% off per year to 3,665.78 and 10 year state rate TMUBMUSD10Y,
to 4.225%, the highest since June 2018.
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