Federal Reserve, Our Economy, Mortgage Rates

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The Fed raises the Federal Funds Rate by 75bp and anticipates ongoing increases will be appropriate. Federal Reserve Chairman Jerome Powell says labor market continues to be out of balance, housing sector has weakened significantly, strongly committed to bringing down inflation as it remains well above the Fed’s 2% goal.

The likelihood of a “soft landing” has come down following the latest Federal Reserve meeting on Wednesday. Things couldn’t have been more hawkish with the Fed’s “dot plot” showing a benchmark overnight interest rate of 4.4% by the end of this year, as well as a terminal rate of 4.6% in 2023 (up from 3.25% and 3.8%, respectively). Lower growth forecasts and higher inflation estimates were also included in the projections, with the unemployment rate going up to 4.4% and leading to job losses of more than 1M (assuming no change in the size of the U.S. workforce).


“The deceleration in housing prices that we’re seeing should help bring sort of prices more closely in line with rents and other housing market fundamentals. And, you know, that’s a good thing,” Fed Chair Powell said. “For the longer term, what we need is supply and demand to get better aligned, so that housing prices go up at a reasonable level, at a reasonable pace, and that people can afford houses again.” This statement obviously helps the case of those who believe that the housing market have to go through a correction to get back to that place.


We all know about the rise in the mortgage rates by now.   Effectively, they have doubled in the last year.   What were recently in the high 2% and low 3% range are now pushing into the high 5% and 6% range.  Inflation is the culprit.   Mortgage interest as well as rents are up dramatically and they are a key component of inflation.    Food prices are up double digit as well as utility costs and transportation costs.   All more than double digit.   These are the average consumers largest expenses.   So how is inflation in the low 8% range?   The answer is that it is not.   Real inflation is actually much higher.   The only thing keeping it in the single digit range is the method by which it is calculated.    Poor public policy has allowed this to get out of control.    Luckily the Federal Reserve is taking drastic actions to bring it back down.   While this is painful for all in many regards, it is necessary.   If your remember the 1980’s, we had persistent double digit inflation and mortgage rates.    The Fed stepped in and pushed short term rates up dramatically to choke off the economy and spending.  They were successful and slowly were able to bring inflation down under 2% which is the range the Fed feels works best for a healthy economy.

History tells us the Fed will need to continue on their path of raising short term rates until they make significant progress on bringing consumer demand down while the supply chain issues are worked through so we can get back to a good balance.  In addition, we need our politicians to stop blowing money into the economy, money we don’t have.

There is another factor which I see having influence on inflation and hence rates which is not generally discussed in the articles I read.

Labor Unions are strong right now.  The railroad workers just got a 20% raise, the longshoremen in are negotiations and UPS contract is up in the Spring.  To say nothing of the 10% or so Social Security increase which is right around the corner.  I think that wage increases tend to be a lagging indicator of inflation but they can help maintain an inflationary cycle because people have more money to spend, which is not really much different than the government dropping it in their lap.

I don’t believe we are likely to have a soft landing, because until people start losing jobs or  the fear of doing so causes people not to spend money (which would likely be the result of a recession), inflation is not going to get back to the 2-3% target range.

Regarding residential real estate, most areas have seen significant increases in marketing time for homes on the market, which has caused housing inventory to increase.  You rarely hear of a multiple offer situation anymore.    Price reductions are more common than multiple offer situations these days.   Most likely, we will see an increase in mortgage defaults, but nothing like we saw back in the Great Recession from 2006 to 2010.    Changing the lending underwriting rules back then produced a much more qualified borrower profile, and many of these borrowers were able to take advantage of the great rates that existed in 2020 and 2021 through refinancing.    Housing inventory will most likely increase the rest of the year and into 2023.  It will take lower mortgage rates to change this trend, and those are not expected in the near term.   The markets need to believe that inflation will be contracting before they allow mortgage rates to start dropping back down, and there is no reason to believe that will happen in the near future.

Our advice to people looking to buy homes now or soon, is to seriously consider the short term ARM’s, as they should have fixed rate periods long enough to get those borrowers to a lower mortgage rate environment.  Take advantage of the lower rates those offer, and then refinance when the rates drop back down.   For example our best jumbo loan source offers 30 year fixed at 5.75%, but their 5 year fixed ARM products offers that same rate at 4.625%, and the 7 year at 4.875%, both of which should get you to a lower mortgage rate environment.    Plus be patient and wait until you find the right house and the right deal.   Inventory will most likely continue to increase and prices should soften more.