Housing market needs to prepare for mortgage rates to reach 10% in 2023, investment bankers say

Joy Wiltermath

Home prices may give up all pandemic gains, says Whalen

Even if Federal Reserve Chairman Jerome Powell and his allies stop raising policy rates soon, 30-year fixed mortgage rates will still be at 10%, according to Christopher Waren, chairman of Walen Global Advisors. will rise.

The reason is that the Fed’s breakneck pace of rate hikes in 2022 will take time to be reflected in mortgage rates. Notably, Fed Fund rates have jumped from almost zero a year ago to he’s already in the 3%-3.25% range in late September.

“Lenders just adjust their rates slowly,” Whalen told MarketWatch. “They’re not used to interest rates moving this fast, and usually he only changes them once a month or every other month.”

Borrowers pay a premium on mortgages above the risk-free Treasury rate to account for the risk of default. The 30-year Treasury yield rose to 4.213% on Thursday, the highest since 2011, according to Dow Jones Market Data.

Freddie Mac said on Thursday that the latest weekly survey showed 30-year mortgage rates averaging 6.94%, the highest in 20 years, and that demand for new mortgages had dropped significantly.

However, with US inflation showing no clear signs of reversing its 40-year high, the Fed could raise rates by another 75 basis points at its November meeting, with a similar increase in December. Expectations are high that it is possible. , according to the CME FedWatch tool.

CME odds on Thursday favored the 4.75% to 5% Fed Funds rate starting February.

“Mortgage has a lag effect,” Whalen said, adding that even if the central bank decides to pause further rate hikes after its December meeting, the 30-year mortgage rate will remain “until February.” will easily reach 10%,” he added.

An investment banker, author and expert with a focus on banking and mortgage finance, Whalen was elected to the U.S. Securities and Exchange Commission in 2008 after banks and investors suffered hundreds of billions of dollars in losses. He called for complex and opaque derivatives to be “back in the daylight.” Tied to structured debt, including subprime mortgage exposures. Also in 2009, she testified before Congress about her systemic risk to the banking industry.

Now, Whalen sees another big shake-up in mortgage banking as profitability continues to be squeezed (see chart) and the housing market is in turmoil.

Importantly, Whalen also sees that if interest rates remain high through 2023, house prices could recoup all the pandemic gains.

That’s a bigger potential than expected for a 10% to 15% house price correction from house prices that surged 45% nationwide during the pandemic.

But Whalen sees speculative home resale volumes reaching about $150 billion in 2022, or 10% of total home sales in 2022, and double-digit mortgages as a catalyst for the plummeting home prices. Pointed to the cold blanket of interest rates.

Economists at Mizuho Securities said in a note to clients on Thursday that median home sales prices had fallen 2.5% from their peak, characterizing the housing market as “worsening”, but a steep rise in mortgage rates. Considering the rise, it is almost as expected.

Mortgage interest rates can be traced directly to the mortgage-backed securities (MBS) market. MBS, mostly government-backed bonds traded on Wall Street, fund a large portion of the nearly $13 trillion U.S. mortgage market.

The Fed’s race to raise interest rates has rocked financial markets this year, driving stock prices down and significantly reducing mortgage bond issuance. And businesses, municipalities and households are making borrowing more expensive as part of their fight against inflation.

“It’s going to take months for the bond and lending markets to get in sync so people can make money again,” Whalen said.

The stock market fell for a second straight day on Thursday, with the S&P 500 index falling 23% to close at 3,665.78 and the 10-year Treasury yield at 4.225%, its highest since June 2018.

-Joy Wiltermath

 

(Closed) Dow Jones Newswire

11-09-22 1454ET

Copyright (c) 2022 Dow Jones & Company, Inc.

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