More Locked-In Talk

Boy are these guys going to be surprised if rates come down and nothing changes.

The difference in rates might have the least to do with being locked in!

Here is more of the psycho-babble – and this guy is a chief economist:

Switching from a lower mortgage rate to a higher one can lead to significantly increased monthly payments. For many homeowners, the cost of selling their current home and purchasing a new one with a higher mortgage rate is financially unfeasible.

What could ease the lock-in effect going forward?

    • Life events: Over time, life events such as having an additional child or receiving a big promotion might prompt homeowners to sell their current homes and move, despite their ultralow mortgage rates. These personal changes could outweigh the financial disincentives for some.
    • Falling mortgage rates: If mortgage rates decrease, improved affordability could entice more homeowners to sell and buy new homes. While homeowners might not trade in their 4.0% mortgage rate for a 7.0% rate, they might consider moving if it means taking on, say, a 5.5% mortgage rate. This reduction in rates, if it occurs, could lower the switching cost and make moving a more viable option.

And odds are, the lock-in effect could take years to fade away.

“Mortgage rate trends aren’t likely to bust the lock-in effect until at least the end of the year, and possibly well into 2025, as the Fed holds fast on fighting inflation,” predicts senior economist Ralph McLaughlin.

“We’ll likely need to see a 150 to 200 basis points drop in the 10-year yield to get there, and at current spreads, this could require three to four rate cuts by the Fed. As of now, the market is pricing in just one to two cuts by the end of the year and two to three cuts in 2025,” he adds.

What are they missing? How hard it is to move.

You have to be willing to grind for months in search of a better home (one that makes it worth moving), juggle the sell-first-or-buy-first equation, pay six figures in capital-gains taxes, pay six figures in closing costs, and then fix up the new house like you did the old house. Sill want to move?

Hat tip to Carl for sending this in:

Summer Rally?

Yesterday, we saw a 6-handle again on the 30-year fixed rate mortgages, and it should come down a little more today.

With there being virtually no upward pressure on pricing – the quartiles just turned slightly lower than last year – we could see the sales momentum pick up if rates can just settle in the sixes.

Lower rates AND prices used to mean something. We’ll see about this year!

Under 7%!

We’re breathing again!

If it feels like we’ve been harping on the prospects for rate volatility in response to today’s inflation data for several weeks (and we have), today is why. The Consumer Price Index (CPI) is the biggest reliable source of momentum for interest rates when it comes to scheduled data–big enough that the results can come in right in line with forecasts and still have a big impact.

Indeed, today’s results were right in line with forecasts. In month over month terms, core inflation was 0.3% and annual inflation was 3.6%. The Fed wants those numbers at 0.1-0.2 in monthly terms and 2.0% annually in order to be more confident about rate cuts. The annual number wouldn’t need to hit 2.0% as long as monthly numbers suggested we were well on our way.

And again, today’s monthly number only suggested 3.6% (0.3 x 12). Despite being almost twice as brisk as desired, the 0.3% rate of monthly core inflation was apparently a relief for bond traders who quickly began pushing rates lower. Mortgage rates are based on mortgage-specific bonds that correlate substantially with US Treasuries.

Other economic data helped the cause with Retail Sales coming in unchanged for April versus forecasts calling for a 0.4% increase.  Taken together, the as-expected inflation data and weaker retail sales suggest cooler inflation pressure relative to Q1’s data–something all fans of low rates were hoping to see.

Mortgage Lenders were able to drop their average top tier conventional 30yr fixed rate to 6.99% from 7.11% yesterday.

FHFA on Lock-In Effect

The pressure to do something to lower rates will be increasing, yet it doesn’t occur to anyone that the gap between what homeowners paid vs. prices today is the real problem – and lower rates won’t fix it.

People can be “locked-in” or constrained in their ability to make appropriate financial changes, such as being unable to move homes, change jobs, sell stocks, rebalance portfolios, shift financial accounts, adjust insurance policies, transfer investment profits, or inherit wealth. These frictions—whether institutional, legislative, personal, or market-driven—are often overlooked.

Residential real estate exemplifies this challenge with its physical immobility, high transaction costs, and concentrated wealth. In the United States, nearly all 50 million active mortgages have fixed rates, and most have interest rates far below prevailing market rates, creating a disincentive to sell.

This paper finds that for every percentage point that market mortgage rates exceed the origination interest rate, the probability of sale is decreased by 18.1%. This mortgage rate lock-in led to a 57% reduction in home sales with fixed-rate mortgages in 2023Q4 and prevented 1.33 million sales between 2022Q2 and 2023Q4. The supply reduction increased home prices by 5.7%, outweighing the direct impact of elevated rates, which decreased prices by 3.3%.

These findings underscore how mortgage rate lock-in restricts mobility, results in people not living in homes they would prefer, inflates prices, and worsens affordability. Certain borrower groups with lower wealth accumulation are less able to strategically time their sales, worsening inequality.?

Record Drop in Mortgage Rates

If rates can slip into the high-5s by next month, the early-2024 market will be on fire….

Survey-based rate indices haven’t yet had time to account for the massive drop in mortgage rates this week, but rest assured, it was special.  That’s no surprise if you saw our coverage yesterday, which pointed out that it was the biggest drop in a 45 day window that we’ve ever measured.

When rates drop that much, that quickly, there’s always some risk that we’ll see a corrective bounce.  Sometimes such corrections only erase a small amount of the improvement over a day or two.  Other times they can be the start of weeks of gradual increases.  Either way, we usually have some indication of that resistance within a few days of the final crescendo.

This time, however, the mortgage rate drop is sticking the landing.  Wednesday and Thursday were the big movement days and now today has seen almost no movement at all.  The average lender is effectively right in line with yesterday afternoon’s latest levels.

While this turn of events can’t predict the future, it is a more reassuring set-up for the days and weeks ahead.  Speaking of weeks, we probably won’t know what the next leg of this journey truly looks like until the 2nd week of January after the next Consumer Price Index (CPI) comes out.

Predicting The 2024 Real Estate Market

Yesterday, Jay Powell shocked the world by declaring three rate cuts in 2024! It was Fed speak of the most unusual order – open and transparent, instead of the opaque mumbling of previous chairmen.

The predictions are for rate cuts early in 2024 too. The CNBC survey showed a 90% probability of a rate cut at the Fed’s March meeting, and 100% chance at the May meeting. This Fedwatch Tool below thinks they will all be in the first half of 2024:

What does it mean for the 2024 Spring Selling Season?

Real estate prognostications are usually wild guesses without any supporting data. But next year looks more predictable than ever – and we’ll be able to track it closely.

Let’s consider how 2023 played out:

In June, I mentioned that 2023 got off to a very fast start, and that March would have the highest sales count of the year – which means buyers and sellers were active in January and February!

We had a mid-summer surge too, and the August sales beat out those in March by a nose.

Because the price points are so much higher these days, every property is a luxury home that appeals to the affluent. It means the homes for sale need to be spruced up more than ever, which takes planning and preparation for weeks and months.

We already know that our team will be listing homes for sale on January 18th and 25th, and there should be many more others doing the same. With the 2023 inventory being so bleak, the pent-up buyers will be noting the lower mortgage rates and be on the prowl early.

We will do our annual January inventory contest to give everyone a feel for how the number of homes for sale is breaking early in 2024. Between the number of January listings and the results of our listings, you’ll have quality data on how the 2024 market is unfolding!

My guess is that there will be 10% more listings in January, and combining that with lower mortgage rates could set off a mini-frenzy!

Pricing was steady this year, and it should bump around by the same +/-5% in 2024. It’s probably not worth it to try to predict your purchase or sale by the price history – it will bounce around just because the metric is flawed.

Rate Buydowns

People might think that 8% mortgage rates will kill the real estate market, but they are one more thing that can be fixed with money.

Two popular strategies to lower the mortgage rate:

30-year fixed rate buydown: Paying one point, or 1% of the loan amount will lower the rate by 1/4%. It would take a few points paid to make a significant difference, and the home seller can contribute too. On a $2,000,000 purchase with 25% down and a loan amount of $1,500,000, the monthly payment is $11,006 at the 8% rate. But the payment can be permanently reduced to $9,358 per month (6.375%) by paying six points, for a savings of $1,648 per month! Hopefully the seller will contribute some or all of the fee.

2-1 temporary rate buydown: Paying 2.4 points will lower the mortgage rate by 2% in the first year, and then by 1% in the second year. With the same $1,500,000 loan, here’s how the 2-1 buydown looks:

In both of those examples, you have a fixed-rate 30-year mortgage. If you are more of a gambler and don’t want to pay any points, the other alternative is to get the 3/1 ARM that has a fixed rate of 6.25% for three years, and then the rate adjusts annually for the remaining 27 years.

Or you can buy a Toll Brothers home:

A side note on Toll Brothers. Their Del Mar Mesa tract where construction was getting underway? They did sell all of those homes.


How are those expert opinions doing?

Doug Duncan, chief economist at Fannie Mae, was acknowledged as the best forecaster in America last year when he was honored with the Lawrence R. Klein Award for Blue Chip Forecast Accuracy, one of the best-known and longest-standing achievements in economic forecasting.

The winner is selected based on the accuracy of forecasts published in the Blue Chip Economic Indicators newsletter, compiled and edited by Haver Analytics, Inc. “It is a real honor for the Fannie Mae forecast team to be recognized with the Lawrence R. Klein Award,” said Duncan.

“The award is based on the smallest average error for GDP, CPI, and unemployment over the past four years,” says Professor of Economics Dennis Hoffman, director of the Office of the University Economist at ASU. “I commend Doug Duncan and his team at Fannie Mae for their remarkable predictions during a period of extensive market fluctuation and instability.”

He predicted we’d be at 4.4% today – the reality:


Rates at 23-Year Highs

The Fed paused alright – Jerome just talks up the rates now!

Rates moved only moderately higher on Wednesday after the Fed rocked the bond market with its updated rate forecasts.  To reiterate yesterday’s analysis, it’s not that the market is expecting the Fed to be accurate in those forecasts.  Rather, the forecasts help investors understand how the Fed’s approach will be calibrated going forward.

In simpler terms, the Fed doesn’t think rates are too high right now.  If anything, they might need to go higher.  Moreover, they won’t go lower until economic data really starts to deteriorate in a compelling way.

Unfortunately, this morning’s most relevant economic report didn’t deteriorate at all (weekly jobless claims were 201k versus a median forecast of 225k).  Actually, it’s fortunate for the economy, but unfortunate for interest rates.

Between the data and the overnight momentum in overseas markets, bonds are at their weakest levels in years.  Mortgage-backed securities (the bonds that dictate mortgage rates) didn’t swoon quite as much as Treasuries, but as of today, it was just enough to push the average mortgage lender almost perfectly back in line with the highest 30yr fixed rate of the past 23 years.

Need a reason to sell now, instead of waiting for next year? It doesn’t matter what you think of Peter or the content. It’s how many people who read this in the first half-day that matters – and this kind of doom spreads like wildfire:

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