Review of the Recent FOMC Statement
- The Fed left rates unchanged. "The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee's assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time."
- The Fed raised the inflation forecast from 2.4% to 3.4%. Inflation is the archenemy of bonds and mortgage rates. This inflation forecast is pushing mortgage rates higher.
- Unemployment is expected to come down to 4.5%. Currently 6.1%. More people that have jobs, the more people buy stuff, which lends to inflation.
- The Fed will maintain asset purchases of 120b per month. "The Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage‑backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee's maximum employment and price stability goals."
The Immediate Impact for Those Purchasing or Refinancing
Interest Rates -- Rates are artificially low. They have to go up. Check out the 2 Year Chart for mortgage backed securities. We are NOT in a normal interest rate environment.
4 Reasons Why I Think We Are Primed for a Housing Crash
- There is too much appreciation, too fast. Median home prices up over 10%. $270,903.40 to $300,986.69 in 2020. In major cities we saw 22% or even higher appreciation which continued into 2021.
- Rates will go up. They are already going up, and the MBA forecast is that the average 30 Year Fixed rate will be over 4% by the end of the year and higher into next. This will increase the cost of housing meaning less borrowers qualify.
- Buyers are already tired. This is evidenced by falling home sales data. Buyer are starting to “sit it out” until the market cools.
- There will be fewer "Buy then Sell" Sellers. In my opinion, many of the “buy first, sell second” Sellers will become anxious with the changing market and start listing first. This will add a plethora of inventory. Note that this is already happening this year as we have seen an increase in home inventory. This is our first step towards a buyer market and price reductions.
The Immediate Impact for Those Purchasing a Home or Refinancing
- Refinancing: It’s a simple loss of savings. Higher rates mean that refinancing won’t be an option anymore.
- Purchasing: The same home will cost substantially more. Take a 500k VA loan at today's rate of 2.75%. Increase the interest rate to 3.25% and the mortgage payment jumps $134.82. Take the rate to 3.75% and the payment for the same 500k loan jumps 274.37.
* Note that a secondary issue of payments going up is that a 1% increase in payment will increase a borrower's DTI (debt-to-income) ratios by almost 3%. That's substantial.
More buyers are going to "wait and see". There will be more renting, more military families settling for base housing, etc.
All in all, the markets have been shaken and housing is right around the corner.
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Get my Refinance Calculator: https://www.loanwithrick.com/ema-refinance-worksheet