July 4, 2023 – It’s All About the Spread. As a reminder, when we speak about spreads, we are not referring to cream cheese.

Economic Commentary

It’s All About the Spread. As a reminder, when we speak about spreads, we are not referring to cream cheese. If you want to know about the future of mortgage rates and how quickly they might fall, it is not enough to study the economic news such as the jobs and inflation reports. It also concerns the spread between government instruments, particularly the 10-year Treasury Note and mortgage rates. First of all, why is there a “spread”? Mortgage rates are higher than Treasuries issued by the government because there is a greater risk of default. The spread gets wider when the risk of default goes up, for example during recessions or in times of great uncertainty. But there is also other factors such as supply/demand and prepayment risk.

When the pandemic hit, the Federal Reserve started purchasing large amounts of Treasuries and mortgages. In 2022, in addition to raising short-term interest rates, the Fed also stopped purchasing these instruments. Thus, a big buyer was removed. Meanwhile, with rates increasing there is more uncertainty than ever in the markets. This uncertainty has hit mortgages more sharply than Treasuries which are backed by the government. Plus, we had regional banks go under and their mortgage holdings are being sold in the market, increasing supply. This just adds to the recent extra supply of sales as the government is playing catch-up after the debt ceiling deal, with a ton of Treasuries hitting the markets.

The result? A normal spread of around 2.0% has become a bit more than 3.0%. With the 10-year Treasury between 3.5% and 4.0%, 30-year mortgage rates should be in the range of 5.5% to 6.0%. Instead, in late June 30-year mortgage rates were closer to 7.0%. The good news is that, as interest rates fall, if these spreads narrow as well, mortgage rates will fall faster than Treasury rates. Will interest rates fall? Going back to economic news, this week’s jobs report will be watched closely to see if the rate of job creation finally slows down, along with wage growth. Stay tuned.

Weekly Interest Rate Overview

The Markets. Rates continue to firm in the face of solid economic news and a hawkish tone from the Fed. For the week ending June 29, 30-year rates rose to 6.71% from 6.67% the week before. In addition, 15-year loans increased to 6.06%. A year ago, 30-year fixed rates averaged 5.70%, approximately 1.0% lower than today. Attributed to Sam Khater, Chief Economist, Freddie Mac, “Mortgage rates have hovered in the six to seven percent range for over six months and, despite affordability headwinds, homebuyers have adjusted and driven new home sales to its highest level in more than a year. New home sales have rebounded more robustly than the resale market due to a marginally greater supply of new construction. The improved demand has led to a firming of prices, which have now increased for several months in a row.”   Note: Rates indicated do not include fees and points and are provided for evidence of trends only. They should not be used for comparison purposes.

Real Estate News

When it comes to buying a home now, there are plenty of challenges. But homeownership can be a great way to build wealth and to maintain housing stability, said Kamila Elliott, a certified financial planner and co-founder and CEO of Collective Wealth Partners, a boutique advisory firm in Atlanta. Achieving that goal now can be challenging, with home prices still elevated and higher interest rates pushing mortgage costs higher, said Elliott, who is a member of CNBC’s Financial Advisor Council. “If you plan on being in the area for five years, you love the home and you’ve done a budget to really assess all the costs of homeownership, I do still believe buying a home right now is a good idea,” Elliott said. There are tips Elliott gives to her clients that may help other prospective homebuyers work toward that big-ticket goal–

1. Prepare for monthly home payments in advance. One of the ways to be in the best financial position to purchase a home is to save, Elliott said. And that goes beyond just the down payment. For example, if you are paying $2,000 a month in rent and you will be spending $3,000 a month once you buy a home, you should try to put away an extra $1,000 a month so taking on the cost of a new home won’t surprise you. You should also work on improving your credit score, which will put you in the best possible position to get a good rate on your mortgage, Elliott said. That means reducing utilization of your credit cards, watching your spending and looking at your credit report to correct any inaccuracies, if necessary.
2. Anticipate unexpected homeownership costs. One of the benefits of buying versus renting a home is the ability to have fixed costs, Elliott said. But homeowners still need to anticipate surprises, she said. With many cities increasing property taxes, prospective homeowners would be wise to anticipate those costs going up. Additionally, they should anticipate paying for landscaping, furnishing and unexpected emergencies such as a pipe bursting. Make sure you have enough liquidity to handle those additional expenses as a homeowner, Elliot said.
3. Look for flexibility on your purchase. Though home prices and interest rates are high, there are still possible ways prospective homebuyers can cut costs. By getting a shorter-term mortgage — say, for 15 years instead of 30 years — borrowers may access lower interest rates. Homebuyers may also want to consider buying points on their mortgage, which can let them lock in a lower interest rate, she said. Prospective buyers who have lower incomes should explore their city or county websites for homeownership or down-payment assistance programs. As homebuying incentives start to come back, such as with closing costs, be sure to ask if there are opportunities to reduce the overall price of the home at this time, Elliott said. Source: CNBC

Rate hikes by the Federal Reserve are taking a toll on the housing market, with existing home sales pulling back 3.4% in April, according to the National Association of Realtors. Over the past year, home sales fell 23.2%, while home prices dipped 1.7% to a median price of $388,800. The higher interest rates are making it more challenging for prospective homebuyers to purchase their dream homes and homeowners looking to refinance. For the latter, high interest rates make it harder for homeowners to refinance at rates lower than their existing mortgage. Many homeowners refinanced their homes during the pandemic when interest rates were at record lows. When mortgage rates will reverse course is anyone’s guess, but we wanted experts to weigh in. Understanding where interest rates are headed can help homebuyers and homeowners alike better understand the options available to them.  Organizations like Fannie Mae and the Mortgage Bankers Association forecast that the average rate on 30-year fixed-rate mortgages will decline throughout 2023, continuing into the first quarter of 2024.  Peter Idziak, senior associate at Polunsky Beitel Green said, “If the Fed stops raising rates because the data shows the economy weakening and inflation coming down further, then I would expect mortgage rates to decrease during the second half of 2023.” Chief Economist at First American Financial Corp, Mark Fleming, says an interest rate drop may not happen for several months. “Possibly in 2024, but it will depend on the Fed’s decisions about raising rates in the second half of the year,” says Fleming. “And even if they do go down, it won’t be back to the rates of yesteryear. 6% mortgage rates used to be normal, and that’s more reasonable to expect too.” Adam Sharif, founder and chief strategist of nxtCRE—a platform for commercial real estate investors—agrees. He adds, “If rates go down, it will be next year and not by much. Today’s interest rates are considered normal by historical measures.”  Source: CBS News