Housing market should brace for mortgage rates hitting 10% in 2023, investment banker says
By Joy Wiltermuth
Home prices could forgo all pandemic gains, Whalen says
Even if Federal Reserve Chairman Jerome Powell and his cohorts soon stopped raising policy rates, the 30-year fixed mortgage rate would still climb to 10%, according to Christopher Whalen, president of Whalen Global Advisors.
Indeed, the breakneck pace of Fed rate hikes in 2022 is slow to seep into mortgage rates, especially since the fed funds rate has already jumped to a 3% range at 3.25. % at the end of September, against almost zero a year earlier.
“Lenders are only slowly adjusting their rates,” Whalen told MarketWatch. “They’re not used to seeing rates move that quickly and usually only change rates once a month or once every two months.”
Borrowers pay a premium above Treasury risk-free rates on mortgages to help account for default risks. The 30-year Treasury rate rose to 4.213% on Thursday, its highest since 2011, according to Dow Jones Market Data.
Freddie Mac said Thursday that the 30-year mortgage rate averaged 6.94% in its latest weekly survey, a 20-year high that has significantly reduced demand for new home loans.
But with US inflation showing no signs of a sharp decline from a 40-year high, expectations are high that the Fed will raise its key rate by another 75 basis points at its November meeting, and potentially by the same. rising again in December. , according to the CME tool FedWatch.
On Thursday, CME ratings favored a federal funds rate of 4.75% to 5% to start February.
“There is a lag effect in mortgage lending,” Whalen said, adding that even if central bankers decide to hold off on further rate increases after their December meeting, the 30-year mortgage rate “would easily reach 10% by February”.
Whalen, an investment banker, author and scholar specializing in bank and mortgage finance, urged the US Securities and Exchange Commission in 2008 to bring complex and opaque derivatives back “in the open”, after banks and investors suffered hundreds of billions of dollars in losses. related to structured debt, including exposure to subprime mortgages. He also testified before Congress in 2009 on systemic risks in the banking industry.
Now, Whalen sees another major shake-up coming in mortgage banking as profitability continues to pinch (see chart) and the housing market tumbles.
Importantly, Whalen also sees the potential for home prices to return all of their pandemic gains if rates stay elevated through 2023.
That’s a bigger call than estimates for a 10-15% correction in home prices from prices that jumped 45% nationally during the pandemic.
But Whalen pointed to speculative home flip volumes that hit nearly $150 billion, or 10% of total home sales in 2022, and cold double-digit mortgage rate coverage as catalysts for a further decline. pronounced house prices.
Economists at Mizuho Securities on Thursday estimated median home sale prices were down 2.5% from their peak, in a client note, and called the housing market “deteriorating” but mostly in line. expected given the sharp rise in mortgage rates.
Mortgage rates can be traced directly to the market for mortgage-backed securities, or MBS, which are bonds that trade on Wall Street, mostly with government backing, that fund most of the U.S. mortgage market. mortgage debt of nearly $13 trillion.
The Fed’s run to hike rates has rattled financial markets, sunk stocks and led to a sharp decline in mortgage bond issuance this year, while making borrowing more costly for businesses, municipalities and households as part of its fight against inflation.
“It will take us months to get the bond market and the loan market in sync so people can make money again,” Whalen said.
Stocks closed lower for a second straight day on Thursday, leaving the S&P 500 index down 23% on the year at 3,665.78, and the 10-year Treasury rate at 4.225%, its highest since June 2018.
(END) Dow Jones Newswire
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