Market Update - May 22nd, 2023
Good afternoon team! Did anybody else enjoy this weekend’s weather by laboring in the yard for the past two days? Haven’t felt aches like this in a while 😊 You know what else is giving me aches? These mortgage rates. We are continuing to see rates creep up as we approach the early June Fed meeting. Read on for all the latest updates.
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What Causes Mortgage Rates to Move?
Kreg and I have explained in past mortgage updates that big headlines from the Fed on their latest interest rates hikes rarely move mortgage rates. This seems counter-intuitive. But last week is a great example we can leverage to explain what DOES move rates : EXPECTATIONS.
In early May, the narrative was the Fed was going to pause on any future rate hikes with the expectation of some pull back in the Fed rate by the end of the year. Rates began to slowly pull back on that news since it signaled the Fed may be thinking inflation was under control. However, since that meeting, additional date points have come out reflecting a resilient US economy. Last week, a majority of the members of the Federal Reserve who report to the chair, Jerome Powell, spoke at various events signaling that inflation was still not under control. From those talks, markets have shifted and the consensus is that the Fed will actually RAISE rates at their next meeting ☹ This is why rates are pulling higher.
When that meeting takes place, if the Fed raises rates by 0.250% then the mortgage rates should remain steady that day since that was EXPECTED. Now if they raise them 0.500% (dear God, please don’t let this happen) we will see a massive spike in rates. If they don’t hike rates in early June, we should see rates pull back since a hike was priced in.
The Debt Ceiling’s Effect on Mortgage Rates
The debt ceiling is the amount US government can borrow. Congress sets the limit. When the government spends more than it collects in revenue, it borrows to make up the difference. If they reach that ceiling without an increase, the government will face difficulties paying bills and servicing existing debt. Failure to raise the debt ceiling can have severe consequences like defaulting on debt payments, damaging the country’s credit rating and massively disrupting financial markets.
It’s difficult to predict what will happen to mortgage rates if the debt ceiling is not raised since it’s never happened before in history. But there are 3 potential scenarios:
Increased Uncertainty – Mortgage rates LOVE uncertainty. Investors could seek safer investments like US Treasury bonds which could lead to a decrease in mortgage rates. Remember when the government was buying up all those mortgages a few years ago? We all know what happened to mortgage rates.
Decreased Investor Confidence – To stabilize investor’s confidence in the US, the Treasury Department will be forced to pay higher interest on its bonds to entice investors to stick around. That would result in higher mortgage rates.
In all likelihood, the ceiling will be raised. Since 1960, Congress has stepped in 78 times. Why not a 79th?
Leading Indicators of a Potentially Slowing Economy – Quick Hitters
Initial Unemployment Claims – Trending up for the past 6 weeks, job market worsening.
Continuing Unemployment Claims – Has risen by more then 500,000 since the low in September 2022, job market worsening.
Manufacturing - LARGE declines in manufacturing in the New York and Philadelphia regions. If manufacturing is down considerably, that likely indicates businesses foresee lower demand which likely means consumers are expected to have lower demand.
Retail Sales – Sales are slowing considerably. Higher prices of individual goods is the main driver for retail sales which means individual unit demand must be far worse. In my opinion, from old retail sales days, when units are down it’s never a good sign.
Mortgage Hack of the Week – Ohio Heroes Down Payment Assistance
Do you know a nurse, firefighter, veteran, teacher or other Ohio resident serving the public who is looking for a home AND needs down payment assistance? They are a perfect candidate for the Ohio Housing Finance Agency’s OHIO HEROES program. Individuals in those fields receive discounted interest rates relative to OHFA’s standard down payment assistance program (currently 0.250% lower rate). Most people don’t know this, but OHFA also offers unassisted loans with competitive interest rates vs. standard loan options. Kreg and I are always looking for the best opportunities for buyers and sometimes this unassisted Ohio Heroes loan is the best option for our clients.
Instagram Posts from Last Week