Mortgage Rates Ease as Inflation Data Arrives Better Than Expected
Interest rates continue to settle around 4.500% on the 10-year Treasury, with emerging signs of easing inflation and potentially achieving a soft landing for the economy (meaning no recession or a mild one). Having observed the markets for a considerable time and recalling the challenges the Fed faced wrangling inflation in the 1970s and 1980s, we maintain a cautious stance. We believe the Fed will keep rates higher for an extended period, even though they are likely done with rate hikes for now.
We are closely monitoring Treasury issuance, given that the US debt load exceeds a concerning $33 trillion. Managing this massive debt ultimately depends on the reduction of interest rates over time. Hence, it is imperative for the Fed to navigate the inflation challenge skillfully. Should they ease too early, there’s the risk of rapid inflation, necessitating rate hikes and possibly the destabilizing of the global economy. Conversely, tightening too much could squeeze businesses and banks, possibly harming the economy unnecessarily.
The recent drop in interest rates is a welcome development. As we previously mentioned, there’s a chance for adjustable-rate mortgages on residential real estate to settle below 6%. Such a move would be highly beneficial for housing and commercial real estate. With the recent rate decline, our office has witnessed an uptick in larger purchases as buyers cautiously re-enter the market. While underwriting remains challenging, some lenders are making sensible decisions for well-qualified borrowers. Additionally, smaller banks, in their quest for loan volume, are willing to forgo income documentation for borrowers with strong credit, at least 40% home equity, and a willingness to deposit funds with their bank.
Housing, however, continues to face challenges. Homebuilder sentiment dipped when mortgage rates briefly touched 8%. Housing starts remain sluggish as construction lenders remain cautious and concerned about construction costs as well as affordability. We’re also detecting a broader economic slowdown, influenced by higher interest rates and a 30% surge in most goods prices over the past few years, just as pandemic stimulus funding tapers off. Nonetheless, low unemployment and the resilience of the US economy should not be underestimated.