The Federal Reserve and Mortgage Rates

The housing market is at a tense moment. The urgency of persistent, painful inflation (+8.6% year-over-year in March; yikes!) finally pushed the Federal Reserve to switch gears. After buying over $100 billion in U.S. Treasuries and mortgage-backed securities each month for months to keep interest rates low during the crisis, they just stopped over March.

More than just that and an increase to the Fed Funds Rate, however, they used a lot of tough talk about pulling back support much faster than the market thinks – a market that got used to the Fed’s lack of alarm about inflation. Markets move with tough talk and that rate spike we’ve seen is the market trying to price in this “more aggressive” plan to combat inflation.

All that is wonky, but what it means is interest rates popped in a BIG way over the first quarter but where they go from here doesn’t have to be straight up. If the Fed’s plans (to be announced later this week) are worse than expected (and the market now expects an aggressive pull back), rates will indeed continue to rise. If we’ve appropriately internalized the Fed’s intent however, rates could continue to hover closer to 5%.

Interest rate lock-in

It might surprise you to know that the record increase in rates over such a short time didn’t slow down the existing for-sale housing market very much. Since sales surged during the pandemic, folks talk about the “new normal”: low inventory and high velocity (a fancy way of saying short time on market).

Pre-pandemic the typical home listing across the U.S. took almost 30 days to go pending in June, the fastest month of the year. In June 2021 the typical listing was only on the market for 11 days, 59% less time than the pre-crisis average from 2018-2019.

In March, amid serious mortgage rate increases, time on market was only 15 days, down even more (63%) from the pre-crisis average for March.

So what gives?

It’s not just buyers that hesitate in the face of higher rates. Sellers do too.

There were over 15 million refinance originations between the start of the pandemic and before rates began to rise in January (ATTOM) – a period of time when the average mortgage rate for prime borrowers was under 3%. If that was one refinance per house, we’re talking over 10% of the U.S. housing stock. Add purchase originations and it’s up to 16% of U.S. housing.

While boomers have measurably moved up retirement due to remote work and pandemic stress, many of them would be among those to nab stunningly low rates. Many who otherwise might have downsized or moved to a more affordable metro in retirement will now be making the decision to age-in-place, incentivized by the leverage of a lifetime to stick around.

You can see it in the numbers. During the Summer through early Winter of 2021, more new listings hit the market each month than the same month averaged across 2018 and 2019. By January, the first month of significant rate growth, new listings were down over 15 percent from pre-crisis levels and remain down over 10% from pre-crisis in March.

Some good news

New listings beat out sales in March, allowing inventory – the number of homes available at any given time – to rise over 10%, more than typical for March which generally sees a 7% lift. That’s good news, but inventory remains less than half what it was pre-crisis. It will take a significant slowdown in sales to let inventory up from its “new normal”.

In the meantime, housing markets remain inventory-strapped and overly competitive. Price pressure – expected to pull back as markets get used to the higher rate regime – is still significant with even less new existing home supply than usual.

In such an environment, an informed, high quality agent is a must. Watching the tap for the drip of new listings and getting the buyer ready to make the right strategic offer on a tight timeline as soon as the right home becomes available is absolutely the good agent’s value proposition.

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