Norada Real Estate Investments

Will Mortgage Rates Drop Below 7% Again This Year?

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As the economic landscape shifts with rising inflation, prospective homeowners and current borrowers are facing a new challenge: mortgage rates nearing the 7% mark. This significant increase is a reflection of the broader economic conditions, particularly the inflation rate that continues to climb.

Inflation's Impact on Mortgage Rates

Inflation, the general increase in prices, and the consequent decline in the purchasing power of money have a complex relationship with mortgage rates. While the two are not directly linked, they move in tandem because inflation influences the Federal Reserve's interest rate policy, which in turn affects the cost of borrowing for lending products like mortgages. When inflation rises, it often leads to higher mortgage rates as lenders need to compensate for the decreased purchasing power of the money they will receive in the future.

Current Mortgage Rates Scenario

As of April 2024, the average rate on a 30-year fixed mortgage has risen to 7.08%, while the 15-year fixed mortgage climbed to 6.43%. This uptick in rates is a response to the stubbornly high inflation, which remains at 3.5% as of March. The Federal Reserve has been striving to bring inflation down to a more sustainable level of 2%, but the recent inflation report suggests that mortgage rates are unlikely to fall anytime soon.

The Economic Outlook

The rise in mortgage rates, coupled with high inflation, is creating a challenging environment for the housing market. The cost of borrowing is increasing, making it more expensive for homebuyers to finance their purchases. This could potentially slow down the housing market, as fewer people might be able to afford the higher monthly payments that come with increased rates.

Advice for Prospective Homebuyers and Borrowers

For those looking to buy a home or refinance their mortgage, it's crucial to stay informed about the current rates and economic forecasts. Comparing rates from various lenders and considering different types of loans can help find the most favorable terms. Additionally, it's important to assess one's financial situation carefully, taking into account the possibility of further rate increases.

The Silver Lining

Despite the rising rates, there is a silver lining for existing mortgage holders. Inflation can erode the real value of outstanding loans, which means that the actual burden of the debt decreases as inflation rises. For instance, with a 10% inflation rate, a $200,000 mortgage's value would effectively reduce by about $20,000 over a year due to inflation alone.

The interplay between inflation and mortgage rates is a critical aspect of the current economic climate. As rates continue to hover around the 7% mark, understanding this relationship becomes essential for making informed financial decisions. By keeping a close eye on economic indicators and seeking expert advice, individuals can navigate these turbulent waters with greater confidence and clarity.

Will Mortgage Rates Drop Below 7% Again This Year?

The question on many homeowners' and potential buyers' minds is whether mortgage rates will drop below the 7% threshold again this year. With the current economic climate, marked by rising inflation and interest rates, understanding the trajectory of mortgage rates is more crucial than ever.

As of early 2024, mortgage rates have seen a steady climb, with the 30-year fixed mortgage rate hovering around 7.08%. However, experts are forecasting a potential decline in mortgage rates as the year progresses. According to Freddie Mac, the average 30-year fixed mortgage rate stood at 6.82% for the week ending April 4. This suggests a slight decrease from the current rates, indicating a possible trend towards lower rates.

Several financial institutions and housing market experts have weighed in on the mortgage rate forecast for 2024. The consensus is cautiously optimistic, with predictions of rates receding over the year, assuming the Federal Reserve acts on its signaled interest rate cuts.

The Mortgage Bankers Association (MBA) projects the 30-year fixed-rate mortgage to end the year at 6.1%, with a further decrease to 5.5% by the end of 2025. Similarly, Fannie Mae's Housing Forecast anticipates the 30-year mortgage rate to conclude 2024 at 6.4%, up from a previous forecast of 5.9%.

The primary driver behind these forecasts is the Federal Reserve's monetary policy in response to inflation. If the Fed decides to cut rates in 2024, this could inject new life into the housing market. However, significant drops in mortgage rates are not expected in the early months of the year. Any reductions are likely to be gradual, potentially beginning in the latter part of the year.

Inflation plays a significant role in the direction of mortgage rates. As long as inflation runs higher than the Fed's target, rates will likely remain elevated. The current inflation metrics, which remain above the comfort level, suggest that mortgage rates will likely stay in the 6% to 7% range for most of the year.

The potential decrease in mortgage rates could improve home affordability and stimulate the housing market. However, the timing and extent of rate declines will be critical. A gradual reduction in rates may not be sufficient to create a meaningful shift in the market dynamics.

While it is challenging to predict with certainty, the expert analysis and economic indicators suggest that mortgage rates may indeed drop below 7% later this year. Homeowners and buyers should stay informed and consult with financial advisors to navigate the changing mortgage landscape. For those considering refinancing or purchasing a home, keeping a close eye on rate trends will be essential in making strategic financial decisions.

Housing and Mortgage Market Outlook for 2024 by Freddie Mac

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In the dynamic landscape of the U.S. economy, where inflation remains a prevailing concern, the trajectory of mortgage rates plays a pivotal role in shaping the housing market. Despite the robustness of the economy, the specter of inflation looms large, potentially extending the duration of higher mortgage rates.

Current Trends and Market Dynamics

According to Freddie Mac, in January, the housing sector experienced a slight uptick in home sales, buoyed by the decline in mortgage rates. However, the persisting issue of limited inventory, compounded by the phenomenon known as the rate lock effect, has hindered the volume of home sales.

Although homeowners' insurance costs are on the rise, they pale in comparison to the substantial financial commitments associated with mortgage principal and interest payments.

The U.S. economic growth, as estimated by the Bureau of Economic Analysis, stood at 3.2% in the fourth quarter of 2023. While this reflects a marginal dip from the previous quarter, it exceeds the anticipated long-term growth projections. The moderation in growth can be attributed to declines in private inventory investment and federal government spending, offset to some extent by sustained consumer spending.

Residential investment, a key component of economic activity, maintained a positive trajectory, albeit at a slower pace compared to previous quarters.

Housing and Mortgage Market Performance

The reduction in mortgage rates, from an average of 7.4% in November 2023 to 6.6% in January 2024, injected some vitality into the housing market. Total home sales for January reached 4.66 million, reflecting a 2.9% increase from the previous month. However, this figure represents a 1.2% decline from January 2023 levels.

Existing home sales, constituting a significant portion of the market, witnessed a notable uptick, registering a 3.1% increase from December 2023. Despite this positive momentum, existing sales remain below the figures recorded in January 2023.

The availability of existing housing inventory saw a modest increase in January 2024, representing a 3.0 months' supply at the prevailing sales pace. However, the median home price surged to $379,100, marking a 5.1% increase from the previous year and exacerbating affordability challenges for prospective buyers.

New home sales, though showing signs of resilience, were accompanied by a growing trend of builders resorting to sales incentives and price reductions to mitigate affordability concerns.

Home prices continued to exhibit strength, with the FHFA Purchase-Only Home Price Index reporting a year-over-year increase of 6.6% in December 2023, outpacing overall consumer price growth.

Mortgage rates, after a brief respite, resumed their upward trajectory in February, reaching an average of 6.8%. This upward trend was primarily driven by inflationary pressures and market expectations regarding the Federal Reserve's policy stance.

Future Outlook and Implications

Banks, as per the Federal Reserve Board's Senior Loan Officer Opinion Survey, have tightened lending standards across various loan categories. This tightening, coupled with expectations of deteriorating credit quality, could have implications for future mortgage lending and overall market dynamics.

In summary, while the stabilization of rates spurred activity in the housing market in January, challenges such as constrained inventory persist, posing barriers to sustained growth in home sales volumes.

Outlook for the U.S. Housing and Mortgage Market

According to Freddie Mac, the economic outlook for the United States remains positive, albeit with expectations of modest growth compared to previous years. This trajectory is anticipated to result in a slowdown in payroll employment growth alongside a marginal increase in the unemployment rate. Despite projections for eventual moderation, inflation is expected to persist above the targeted 2% level in the short term, fueled by the momentum of a growing economy.

Given these economic conditions, it is unlikely that the Federal Reserve will enact rate cuts until at least the summer, with the possibility of further delays if inflationary pressures persist. Consequently, treasury yields are expected to remain elevated in the near future, thus maintaining mortgage rates at heightened levels. Forecasts indicate that mortgage rates are likely to stay above 6.5% throughout the current and subsequent quarters.

The housing market continues to face challenges stemming from elevated mortgage rates and a dearth of available inventory for sale. However, there is optimism for a gradual recovery in home sales, particularly in the latter half of the year, as mortgage rates ease under a scenario where inflation approaches the target level. Nevertheless, the rate lock effect may impede the influx of homes onto the market, constraining the extent of this recovery.

Expectations suggest that upward pressure on home prices will persist, driven by an influx of first-time homebuyers into a market plagued by supply shortages. Consequently, forecasts indicate a projected increase in home prices of 2.5% in 2024 and 2.1% in 2025.

Under the baseline scenario, it is anticipated that the dollar volume of purchase origination will witness modest improvement in 2024 and 2025. Despite robust price growth, this optimism is tempered by factors such as a modest recovery in home sales and a rising prevalence of cash purchases, both of which are anticipated to limit significant growth in purchase origination volumes.

While projections indicate a potential drift downward in mortgage rates, the prospects for refinance activity remain limited. Many homeowners have already secured historically low mortgage rates, diminishing the incentive for refinancing. Consequently, total mortgage origination is expected to remain subdued for the majority of 2024, with modest increases anticipated toward the year's end and into 2025.

Although the overall outlook remains optimistic, a degree of caution is advised, particularly considering the protracted battle against persistent inflation. Additionally, concerns regarding deteriorating credit quality could pose challenges to housing demand, although significant negative credit events are not anticipated under the baseline scenario.

Surge in Mortgage Applications Despite Holiday Season

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Despite the holiday season, homebuyers and homeowners are rushing to secure mortgages, leading to a significant 9.9% increase in applications, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey. The last week of December witnessed a drop in mortgage applications, but the overall trend indicates a noteworthy surge.

Key Insights from MBA's Weekly Mortgage Applications Survey

The Market Composite Index, serving as a gauge for mortgage loan application volume, experienced a substantial 9.9% increase, marking a 45% rise compared to the previous week. Joel Kan, MBA Vice President and Deputy Chief Economist, noted that despite an uptick in mortgage rates at the beginning of 2024, applications increased after adjusting for the holiday.

Refinance and Purchase Indices

The holiday-adjusted Refinance Index surged by an impressive 19% from the prior week, indicating a robust refinance market. Additionally, the unadjusted Refinance Index exhibited a remarkable 53% increase from the previous week and was 17% higher than the same week in the prior year. The seasonally-adjusted Purchase Index also saw a substantial rise of 6% from the previous week, indicating increased activity in the home purchase market.

Market Dynamics and Government-Backed Loans

The refinance share of mortgage activity increased to 38.3% of total applications, up from the previous week's 36.3%, showcasing the dominance of refinance transactions in the current market. The adjustable-rate mortgage (ARM) share of activity decreased to 5.4% of total applications, indicating a preference for fixed-rate mortgages.

Government-backed loans also experienced changes in market share. The FHA share of total applications decreased slightly to 14.4%, while the VA share increased to 16.3%. The USDA share of total applications decreased marginally, reflecting shifts in demand for different types of government-backed loans.

Impact of Rising Rates on Contract Interest Rates

With rising rates impacting the market, the average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances increased to 6.81%. Jumbo loan balances also witnessed an increase, with the average contract interest rate for 30-year fixed-rate mortgages rising to 6.98%. FHA-backed mortgages saw a similar trend, with the average contract interest rate increasing to 6.56%.

The 15-year fixed-rate mortgages also experienced a rise in the average contract interest rate, increasing to 6.41%. Meanwhile, 5/1 ARMs faced a notable increase in the average contract interest rate, reaching 6.17%. These changes in contract interest rates indicate the impact of rising rates across different mortgage products.

What Does It Mean for the Housing Market in 2024?

The surge in mortgage applications, despite the holiday season and rising rates, raises questions about the trajectory of the housing market in 2024. While the increase in both purchase and refinance applications is promising, industry experts suggest that it may be attributed to a catch-up in activity after the holiday season and year-end rate declines.

Overall market activity remains volatile, and the housing market is likely to experience fluctuations in the coming months. Homebuyers and homeowners should closely monitor market trends and mortgage rates to make informed decisions. The dominance of refinance transactions and shifts in government-backed loan preferences indicate the dynamic nature of the current real estate landscape.

The housing market in 2024 is poised for a mix of challenges and opportunities, driven by factors such as rising interest rates, consumer demand, and economic conditions. It remains essential for individuals involved in real estate transactions to stay informed and adapt to the evolving market dynamics.

New FHFA Mortgage Rule: Fees Structure to Change on May 1

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New FHFA Rule on Mortgage Fees

The Federal Housing Finance Agency (FHFA) recently announced changes to the loan-level price adjustments (LLPAs) for borrowers with conventional mortgages backed by Fannie Mae or Freddie Mac. The changes, which are set to take effect on May 1, 2023, will impact the pricing structure of mortgages for borrowers.

New Mortgage Pricing Structure

The FHFA's new pricing structure will vary based on credit scores and down payments made by borrowers. Borrowers with higher credit scores and lower down payments are likely to see a reduction in fees, while those with lower credit scores and higher down payments will see an increase in fees. For instance, a borrower with a 700 credit score and a 20% down payment will now pay a fee of 1.375% compared to the previous 1.25% upfront.

Who Benefits and Who Pays More?

Borrowers with a credit score of 780 or higher who put down 3% will pay a fee equal to 0.125% of their loan amount, as opposed to the previous 0.75% of the loan amount. This could translate into significant savings for borrowers. However, the National Association of Realtors has pushed back against these changes, citing affordability concerns for borrowers and compliance issues for lenders.

Another fee change is expected to take effect on August 1, following pushback from the mortgage industry. This change would add an upfront fee for borrowers with a debt-to-income ratio (DTI) above 40%. While some industry leaders have urged the FHFA to reconsider the rule, the FHFA has yet to make any announcements about delaying this particular rule.

What New Rules Mean for People with Higher Credit Scores

While the new pricing structure may have unintended consequences for homebuyers with higher credit scores, it is still better than having a lower score. The new rules could lead to higher closing costs for buyers with higher credit scores, but they will still get a better deal than those with lower scores. It's important to note that these changes will not apply to FHA, VA, or USDA loans, and homebuyers should continue to pay their bills on time and avoid purposely lowering their credit scores.

Potential Risks for Borrowers with Lower Credit Scores

While the new pricing structure may benefit borrowers with higher credit scores, those with lower scores could be at risk of paying higher fees, making it harder for them to qualify for a loan or to afford a home. As a result, industry leaders have expressed concerns about affordability for these borrowers. Furthermore, some experts have pointed out that the new pricing structure could exacerbate existing inequalities in the housing market, particularly for marginalized communities who already face barriers to homeownership.

Lender Compliance Concerns

Lenders face compliance concerns as they try to adapt to the new pricing structure. Many lenders have already invested heavily in their systems to comply with the previous pricing structure, and the new changes could require additional investments in technology and personnel. The National Association of Realtors has urged the FHFA to delay the implementation of the new pricing structure until January 2024 to give lenders more time to adapt.

The new pricing structure will also impact borrowers who are looking to refinance their existing mortgages. Borrowers who have built up equity in their homes may be able to benefit from lower interest rates, but they may also have to pay higher fees if they have lower credit scores. The changes could make it more difficult for these borrowers to refinance their mortgages and access the savings that come with lower interest rates.

FHFA's Response to New Mortgage-Fee Rule

The Federal Housing Finance Agency (FHFA) recently updated the pricing framework for Fannie Mae and Freddie Mac (the Enterprises). This change has attracted a lot of attention and unfortunately, much of what has been reported is based on a fundamental misunderstanding about the fees charged by the Enterprises and the reasons behind their update.

FHFA's Objectives and Actions

The FHFA is primarily a safety and soundness regulator, and the Enterprises were chartered by Congress to provide liquidity, stability, and affordability by facilitating responsible access to mortgage credit through their activities in the secondary market. To achieve this mission, the Enterprises charge fees to compensate them for guaranteeing borrowers' mortgage payments. A portion of these fees are “upfront” fees that are based on the risk characteristics of the borrowers and the loans they are obtaining.

It had been many years since a comprehensive review of the Enterprises' pricing framework was conducted. FHFA launched such a review in 2021, with the objectives to maintain support for purchase borrowers limited by income or wealth, ensure a level playing field for large and small lenders, foster capital accumulation at the Enterprises, and achieve commercially viable returns on capital over time.

FHFA took several steps over the past 18 months to achieve these objectives. First, targeted fee increases were announced for second home loans, high-balance loans, and later, cash-out refinances. Next, upfront fees were eliminated for certain groups core to the Enterprises' mission, such as first-time homebuyers with lower incomes who nonetheless have the financial capacity and creditworthiness to sustain a mortgage. Finally, in January, the upfront fees for most purchase and rate-term refinance loans were recalibrated. These actions work collectively to create a more resilient housing finance system.

Addressing Misconceptions

The final step, in particular, seems to have attracted a series of recent misconceptions despite being announced over three months ago. Director Thompson addresses these misconceptions directly:

Higher-credit-score borrowers are not being charged more so lower-credit-score borrowers can pay less. The updated fees, as was true of the prior fees, generally increase as credit scores decrease for any given level of down payment.

The new framework does not incentivize a borrower to make a lower down payment to benefit from lower fees. Borrowers making a down payment smaller than 20 percent of the home's value typically pay mortgage insurance premiums, so these must be added to the fees charged by the Enterprises when considering a borrower's total costs.

The targeted eliminations of upfront fees for borrowers with lower incomes – not lower credit scores – primarily are supported by the higher fees on products such as second homes and cash-out refinances.

The changes to the pricing framework were not designed to stimulate mortgage demand.

Why This Matters

Since entering conservatorship in 2008, the Enterprises have remained undercapitalized and maintain a taxpayer backstop should they confront significant losses. This change will better protect taxpayers in the long term and put the Enterprises on more durable footing, which will allow them to support affordable, sustainable mortgage credit across the economic cycle to the benefit of all Americans.

The updated pricing framework will further the safety and soundness of the Enterprises, which will help them better achieve their mission. They will provide reliable liquidity to the market while also providing more targeted support for creditworthy borrowers limited by income or wealth. And they will do so with a pricing framework that is more accurately aligned to the expected financial performance and risks of the loans they back.

Summary

The updates made to the pricing framework of Fannie Mae and Freddie Mac are designed to bolster safety and soundness, better protect taxpayers, and support affordable, sustainable mortgage credit across the economic cycle. These changes were made after a comprehensive review of the Enterprises' pricing framework to ensure a level playing field for large and small lenders, foster capital accumulation at the Enterprises, and achieve commercially viable returns on capital over time.

Contrary to recent misconceptions, the updated fees do not unfairly charge higher-credit-score borrowers more to benefit lower-credit-score borrowers, nor do they provide incentives for borrowers to make lower down payments. The targeted eliminations of upfront fees for certain groups, such as first-time homebuyers with lower incomes, are primarily supported by higher fees on other products.

The updated pricing framework will help the Enterprises better achieve their mission of providing liquidity, stability, and affordability in the mortgage market, while also promoting safety and soundness and protecting taxpayers.

References:

  • https://www.businessinsider.com/personal-finance/biden-fhfa-new-mortgage-fee-structure-2023-4?IR=T
  • https://www.fhfa.gov/Media/PublicAffairs/Pages/Statement-from-FHFA-Director-Sandra-Thompson-on-Mortgage-Pricing.aspx

FHA Likely To Be The Next Shoe To Drop

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The FHA is a big reason that home prices haven't fallen even further. The FHA's aggressive lending programs have continued throughout the housing downturn, causing its market share of the mortgage industry to grow from 2% in 2005 to 23% today. The FHA is an even larger percentage of the new home mortgage industry – nearly 25% according to HUD.

The FHA insurance fund, however, is likely running dry. According to a report from mortgage finance experts, the FHA will not meet its minimum requirement as of its fiscal year-end, which is only 26 days from now. For months, we have been investigating this and reporting our findings to our clients.

While almost all of the experts believe that Congress would support the FHA if necessary (it's currently self-funded), we wonder if FHA officials will be under pressure to continue tightening their lending policies, which currently allow 96.5% mortgages to people with 600 FICO scores. Already, FHA has contracted its own standards to require a 10% down payment for those with credit scores below 500.

Claims against the insurance fund have climbed, with roughly 7% of all FHA-insured loans now delinquent.

Given the FHA's September 30 fiscal year-end, this financial reality will come to light about the same time that other market forces run out of steam:

  • Just as the $8,000 tax credit expires.
  • Just as more of the stalled REO currently held on banks' balance sheets will be coming to market.

The culmination of all these factors means housing could see another leg down by early next year. 

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