10/30/2023
Trick or Treat?
From Tuesday into Wednesday this week, the Federal Reserve Bank meets for the seventh time this year. All eyes will be focused on their policy directive with regard to the future course of interest rates. As inflation has been the focus this year, the hope is that the aggressive stance by the Fed has tamed the inflationary spiral. Some economic indicators have shown this to be the case, yet others have not. So, are we out of the woods yet and where does this leave the housing market?
Mortgage rates have ballooned to almost 8 percent as of last week. While interest rate policies are dictated by the Fed, it is the marketplace that dictates mortgages. The historical spread between the 10-year Treasury note and prevailing mortgage rates is around 2 percent. Meaning that if the Treasury note is at 3 percent, then the mortgage rate historically, should be around 5 percent. Currently, the spread is three percent. With the Fed tightening monetary policy, costs rise for all classes of borrowers.
As mortgage rates have ballooned past the nominal spreads to Treasuries, restraints have constricted the housing market. An additional dilemma has dampened the market. Many existing homeowners took advantage of miniscule mortgage rates before the current tightening phase. The 30-year mortgage fell below 3 percent and homeowners pounced to refinance. Now these homeowners who may be inclined to sell must face the reality that their monthly payments will skyrocket should they wish to move.
So, all eyes in the financial and housing arenas will be focused on the Fed announcement on Wednesday. The hope here is that their efforts have done the ‘trick’ with inflation and the ‘treat’ will be a more robust housing market and lower mortgage rates.