Making Sense of Mortgage Rates
Every real estate conversation these days seems to focus on rising interest rates, which is causing uncertainty in our industry. Yet mortgage rates have actually come down in the past two weeks. How can banks lower mortgage rates at the same time the government is increasing interest rates? If you are scratching your head, you’re not alone.
I listened a great talk from Lawrence Yun, the Chief Economist for NAR, and he explained it well. I want to share his thoughts with you, so you can make sense of it too.
Let’s start at the start, so you can see how we got here. When we look back two years ago when the pandemic hit, there was a tremendous amount of uncertainty. The governments went all in to bring the interest rates down as low as possible and that was a big stimulator for real estate. As much as COVID is a terrible virus that disrupted our lives, it also boosted demand for more housing. People living in small apartments wanted more space, people living in the city wanted to be in the suburbs, etc.
For the past two years, buyers have taken advantage of historically low interest rates of about 3%, but those rates have now almost doubled. The Fed controls the rate at which banks borrow money, but they don’t control the rate at which the banks lend money to consumers. The rates banks charge are more closely aligned with the bond market.
At the beginning of this year, the Fed had only raised their interest rate once by 25 basis points, yet the banks increased their rates substantially. Why did that happen? The answer is that although the Fed had only raised interest rates once, the banks anticipated they would raise rates another 8 or 9 more times this year, so they already priced that in. There have often been times throughout recent history when the Feds increased rates significantly but the mortgage rates barely budged. This is because there is not a 1:1 relationship between what the Feds do and what the banks do.
The Feds will continue to raise rates for the remainder of this year, but the mortgage rates may not continue to increase all that much because the increases have already been priced in. Let’s keep our fingers crossed that the economists are right about that.
Why do the Feds keep raising interest rates? Because their mandate is to stimulate the economy when needed, but also to contain inflation.
Oil prices have had a dramatic effect on inflation. Realtors drive far more than the general population, so we definitely feel it, but your clients are also feeling it. We feel it at the gas pumps, but we also feel it with any goods that must be transported. Food has gone up, clothing has gone up, utilities have gone up, air fares have gone up. I don’t know if there is any sector that hasn’t felt the pressure of high gas prices. With sanctions on Russian oil, and the fact that we are trying to move toward clean energy and drilling less, there is an oil shortage which will keep prices high for quite some time.
Wages are on the rise, but unfortunately not enough to offset the increased price of goods. The middle class is feeling the crunch. But here is what you need to say to your clients. History has shown that real estate is always a good hedge against inflation. Even back in the 1970’s when inflation was high at 7.1%, house prices increased by 9.9% so homeowners were protected. When prices are rising, that also means rents are rising and when rents rise that provides support for house prices. Inflation is frustrating, but if you want to protect against inflation, buying real estate is a safe bet.
As mortgage rates rise, some buyers are being priced out of the market, but I believe the market is normalizing and we are heading toward a balanced market (which is good news).
The last thing I want to talk about is the current job market. We had positive news in the US this week, but only so-so news in Canada. Canada’s job report for June shows we lost 43,000 jobs, yet our unemployment rate is at 4.9% which is lower than it was pre-pandemic. Some people would say it is because fewer people are searching for work.
On the other hand, the US has added over 350,000 jobs every month for the past few months. The private sector has recovered all their job losses due to the virus. The most significant increase has been in the number of self-employed entrepreneurs in the workforce. Ingenuity and creativity are alive and well.
What does that mean for us? A very important member of your team is going to be a very good mortgage loan officer. With a significant increase in business for self, the complexities around getting this type of buyer approved will take an exceptional loan officer. They will need to be able to package the deal in such a way that an underwriter can appreciate their situation.
Regardless of who your buyers are and what they do for a living, every buyer should be rate locked to protect them from possible rate increases while they are house hunting. Ensure your buyers are not just pre-approved but committed. Some mortgage companies will complete all the underwriting required to approve the buyer, and the mortgage is then only subject to the property appraising. When you have this level of commitment from the lender, your buyers can confidently compete with cash buyers.
You should connect with your preferred mortgage lender. Ask them to give you with a checklist of items your buyers need to provide to get rate locked as well as to get a commitment letter.
Regardless of what is happening in the market, houses will be sold. The question is: will they be sold by you?
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