Mortgage Update - May 13th, 2024
Hello all! Hope you all had a wonderful Mother's Day! It was a beautiful day to celebrate the incredible women in our lives. A very big week ahead in the mortgage world! Let's jump in!
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Rates Finally Move Lower👌
Writing this newsletter has been quite challenging recently, with each week bringing the same news: Rates on the rise! However, we've finally caught a break as rates saw improvement last week for the first time in over a month! Thank you, sweet baby Jesus!
While it wasn't a significant shift, rates did show a slight improvement of around 0.125%. The primary reason behind this improvement was the Jobless Claims report released on Thursday. This report tracks the number of people filing for unemployment benefits for the first time. Surprisingly, the number of initial Jobless Claims came in at 231,000, exceeding projections by 21,000. This marks the highest level of Jobless Claims since August 2023, indicating the economy might finally be weakening.
Remember, the reason the Fed has kept rates higher for longer was to cool the economy. The uptick in job losses serves as a clear indication that their policy of higher rates is starting to show results. This bodes well for mortgage rates and suggests that a weaker economy is ahead, which could pave the way for lower rates.
Key Takeaway: A sluggish or weakening economy will prompt the Fed to eventually shift its stance and lower rates. The increased number of Jobless Claims is a clear indication that the economy is softening.
Government Looking to Make it Cheaper to Tap into Home Equity 💰
When it comes to tapping into your home equity, you currently have two options:
Complete a Cash-Out refinance, which requires you to close out your original mortgage to initiate a new one. This can be financially burdensome since you would be giving up a low rate likely secured during the COVID pandemic and obtaining a considerably higher interest rate in today's market.
Obtain a Home Equity Line of Credit (HELOC), which is essentially taking out a second mortgage on your home. The HELOC allows your first mortgage to stay intact, which is ideal if you scored a super low rate in the past. The downside with a HELOC is the rates are often adjustable and are high.
Neither option above is ideal in a high interest rate environment. However, Freddie Mac (government entity that backs Conventional loans) recently made a proposal to enter the HELOC market. This is very intriguing as Fannie Mae and Freddie Mac currently only back first mortgage purchases and do not back second mortgages or HELOC's. As a result, if a borrower defaults on a HELOC, the bank or credit union that offered the HELOC bears 100% of the loss, as it is not backed by Fannie/Freddie. This higher risk is why rates on HELOC's are adjustable and much higher.
With Fannie/Freddie potentially entering the HELOC space, we can expect every mortgage company to start offering HELOCs to clients in the future. The increased competition/liquidity and backing of Fannie/Freddie will likely result in a decrease in the interest rates on these HELOC products, which would be a huge benefit current homeowners!
Unfortunately, this proposal does not benefit everyone. Who does this hurt the most? Those wishing to enter the housing market. Easing the access into existing homeowner's equity is going to result in more homeowners staying in their home for longer. Intensifying the current lock-in effect is far from ideal, especially when we are in dire need of increasing housing supply 🙁
Big Inflation Report This Week 📃
The most recent significant surge in mortgage rates followed the CPI Inflation report that was released on April 10th. That April reading marked the second consecutive month of higher-than-expected inflation. The next CPI inflation report is scheduled to be released this Wednesday, May 15th.
Currently, the CPI inflation reading stands at 3.5%, which is still pretty far from the Fed's target range of 2%. If we see inflation increase for a THIRD consecutive month, all hell is going to break loose in the mortgage market. Prepare for rates to swiftly move back into the mid 7% range.
However, if inflation reverses course and begins to decline, anticipate rates to ease, potentially kissing the 7% range goodbye.
Key Takeaway: Keep in mind, the Fed has continually stated that they will rely on data when it comes to making a decision on lowering rates. If inflation continues to increase, there will be absolutely no justification to lower rates anytime soon. However, if we see inflation finally begin to recede again, lower rates will soon be on the horizon.