Mortgage rates in the 4's and 5's in 2023?

[Kenny Simpson]

The FED is slowing pace on rate hikes, the consumer is slowing and the economy is headed into a recession? These are all guesses at this point and some believe this will happen or is happening. If the FED eases with less rate hikes, that is signaling they need to slow down because the rate hikes are working and inflation is coming down. We have had recent reports that inflation is slowing 9% + to 7.7% and that has already had an affect on long term rates. The 30 year fixed mortgage as I type this sits around 6.125%, conventional NO POINTs and VA 5.5% NO POINTs. Those rates just weeks ago were .5%+ higher.

Do you see VA/FHA rates in the 4's and conventional in the mid to low 5's is possible by Q2 of next year? If that is the case we are talking new buyers saving $800 + a month here in San Diego on entry level homes. Home prices lower, rates lower, seems like the perfect storm for first time home buyer or to pick up your first investment property?

[Dan H.]

Quote from @Kenny Simpson:

The FED is slowing pace on rate hikes, the consumer is slowing and the economy is headed into a recession? These are all guesses at this point and some believe this will happen or is happening. If the FED eases with less rate hikes, that is signaling they need to slow down because the rate hikes are working and inflation is coming down. We have had recent reports that inflation is slowing 9% + to 7.7% and that has already had an affect on long term rates. The 30 year fixed mortgage as I type this sits around 6.125%, conventional NO POINTs and VA 5.5% NO POINTs. Those rates just weeks ago were .5%+ higher.

Do you see VA/FHA rates in the 4's and conventional in the mid to low 5's is possible by Q2 of next year? If that is the case we are talking new buyers saving $800 + a month here in San Diego on entry level homes. Home prices lower, rates lower, seems like the perfect storm for first time home buyer or to pick up your first investment property?

I do not see it happening because housing is too large of a segment of the economy. Housing consists of many renters and rents are increasing at a crazy rate. Core Logic recently released numbers showing YOY rent increased almost $700 for a San Diego SFH. In case you think that has slowed, the quarterly increase was $130 which is not quite as fast, but still way too fast.

The issue is there are many reasons rents are increasing and raising rates does not help lower the rent increases.  Increased rates makes it more difficult for first time buyers because 1) the financed payment goes up 2) it decreases movement which results in boomers, etc not downsizing which lowers volume on the market and helps keep the prices from falling.

Other drivers for these large rent increases are the recent property appreciation (last 10 years have had huge RE appreciation) and rents lag the property value increases, the Covid eviction moratorium has identified new risk that must be reflected in the income, the continuing trend to move to high growth areas which results in a large housing shortage in these areas, the lag of new housing starts that has existed since the Great Recession.  

Therefore, the rate increases cannot address a primary source of inflation, but the fed has few tools available to fight inflation and raising rates is their primary tool to fight inflation.  It will take many months to get inflation to a tolerable level.  My belief is fed would find 4.5% tolerable, but even if you believe 5% is tolerable, we are not close to being there.  

I expect fed to increase its rates at least 2 more quarters and would not be surprised if it is significantly more than 2 quarters.  Fed raises rates typically results in increased mortgage rates.

I think we are in for a bumpy ride.