Wednesday, June 22, 2022 / by Becky Trujillo
With all the questions surrounding the current market and interest rates we wanted to put together a short summary of where things are and how some market experts are predicting it will play out.
Currently the United States is experiencing rising inflation. Inflation is the enemy of long-term investments such as mortgage backed securities because it erodes their value over time. Therefore, the only way for mortgages to be an attractive option for investors is to raise rates to account for the loss of value over time.
There are some other factors impacting mortgage rates, such as the fed balance sheet run off, but inflation has been the main driver.
Well now the Fed is trying to stop inflation by decreasing the amount of money in the market by raising the Fed funds rate. June 15th, 2022 was one of the largest increases (.75 Bps) in history. This will hopefully slow the amount of liquidity in the market and eventually push us into a recession.
Why do I say “hopefully”? Well first because that’s what many of the smartest economists in my industry believe is the only way to stop this crazy inflation train. And second because I am real estate bias and below you will see what we believe a recession will do for the market.
How will a recession impact mortgage rates?
The grey columns below are Recessions. As you can see historically mortgage rates decline after a recession. Again the top economists in our industry we follow are predicting interest rates to be down significantly in first quarter of next year.
How will a recession impact housing prices?
The dark columns below are recessions. As you can see historically, outside of the housing bubble, home prices increase after a recession. This is mainly due to the increase in liquidity caused by the lowering of interest rates. Also, with the current lending guidelines we are in a completely different situation than the housing bubble. So again the top economists in our industry believe we are going to continue to see appreciation through the end of this year because of the housing shortage and well into next year if we hit a recession at the end of this year.
Also, here’s a little something to answer another question I get asked a ton. Are we in a housing bubble?