The real estate market, buoyed by the new construction home segment, has been a resilient force amid challenges in the resale home inventory. However, recent cracks in the armor are starting to emerge as new home sales experienced an 8.7 percent dip in August. The culprit? Soaring interest rates that are poised to reach unprecedented levels, potentially hitting double digits by 2025. In this blog post, we’ll explore the current dynamics, the impending surge in mortgage rates, and the ripple effects on the housing market.
The Rising Tide of Interest Rates
Interest rates, once hovering around the seven percent range, are now inching closer to eight percent. The prognosis suggests a climb to the 10 percent mark within the next year and a half. The Federal Reserve, considering the current rate level as the natural rate (5.5 to 6 percent), anticipates inflationary pressures. Consequently, the Fed is expected to raise rates above this threshold, triggering a cascading effect on mortgage rates.
Unraveling the Math: Federal Reserve Rates and Mortgage Company Markup
Understanding the trajectory of mortgage rates involves dissecting the Federal Reserve rate and the markup imposed by mortgage companies. The natural rate identified by the Fed is around 5.5 to 6 percent. Mortgage companies, to turn a profit, typically add a markup ranging from 1.5 to 4 percent. However, due to reduced mortgage volumes and increased risk, mortgage companies may need to elevate this markup to 3.5 to 4 percent. The resultant equation leads to mortgage rates soaring to the 10 percent mark.
Echoes of the Past: Double-Digit Mortgage Rates Revisited
While a 10 percent mortgage rate might seem high in the current context, historical perspectives reveal that it’s not an anomaly. In the 1980s, mortgage rates surged to 12, 14, and even 18 percent for a brief period. Parallels with today’s economic landscape, marked by previous inflationary periods and the need for higher rates, offer insights into the plausibility of returning to double-digit mortgage rates.
Unusual Trends: Refinancing Surges Amidst Rising Rates
A peculiar trend has emerged amidst the escalating interest rates – an unexpected surge in refinancing during the second quarter of 2023. In a climate where one would anticipate a decline in refinancing activities due to higher rates, the numbers tell a different story. The explanation lies in the fact that those refinancing had rates below the prevailing six and a half percent rate. This anomaly suggests that individuals are resorting to cashing out equity from their homes, even at the cost of higher interest rates.
As the real estate landscape navigates through turbulent waters, we invite you to share your thoughts. How do you perceive the impact of rising interest rates on the housing market? Are you witnessing any shifts in buying or refinancing behavior? Join the conversation in the comments section below and contribute to the collective understanding of the evolving real estate dynamics.