Potential home sellers and buyers remain stuck in a sort of financial gridlock. Homeowners are reluctant to put their properties on the market because buying a new home will be costly. Would-be buyers can’t find affordable homes due to the lack of inventory. And the cost of purchasing a home remains high with so few homes on the market and interest rates staying elevated.
“We’ve been in such a super low-rate environment and to get to this point this quickly is what’s so painful for the industry.”
What could ease this tension is a decline in interest rates, said Marty Green, principal with Polunsky Beitel Green LLP, a law firm that provides legal support to residential mortgage lenders. Once rates drop, the dam could finally break open.
“We’d see some sellers get back in the market and that might improve our inventory a lot, which would be a good thing for the market,” Green said.
Green, in his role representing mortgage lenders, is a close observer of the Federal Reserve. He spoke to Scotsman Guide about when he thinks interest rates could drop, whether there will be a recession and what could happen that would roil the financial picture.
Do you think interest rates will continue to rise?
They’re going to continue to bounce. That’s how I would describe it. The general trend line is going to be pretty flat. We’ll see a few times where they’ll bounce up very uncomfortably. We’ll see some opportunities where they’ll bounce downward until we finally get into a downward trend at a more steady pace, probably in mid-2024.
Why would it happen then?
One, inflation will be much more in the rearview mirror, which may give the Fed latitude to moderate their position with respect to rates and maybe even drop it a little bit. The other thing that will happen is that once everyone becomes much more comfortable that inflation is in the rearview mirror and we’re not going to see additional increases, the premium that we currently see between mortgage rates and Treasurys will melt away.
Is the angst in the mortgage industry and among potential homebuyers about elevated rates justified?
It is. It’s changed the behavior of buyers and sellers along the way. To some extent, the rate itself is not the problem. It’s where you’ve been. That’s the issue. We’ve been in such a super low-rate environment and to get to this point this quickly is what’s so painful for the industry. What it has done is sort of frozen a lot of homebuyers and home sellers.
What have the rate increases done to the housing and mortgage markets?
Sellers may be ready to downsize or ready to do something else, but when they look at the delta between what they are paying now and what they will pay on a new mortgage, it just creates a paralysis situation where the timing just doesn’t seem right. On the mortgage side, the higher rates have really stressed margins so that mortgage companies are not making much money at all.
Does it seem like the housing and mortgage industries are ‘taking it for the team’ for the benefit of the entire economy?
No question. We may have benefited unduly during the pandemic and the boom that we saw there in terms of the increase of activity. We’re certainly paying for it now.
Has the Fed’s attempt to rein in inflation been effective?
Largely it has. If you look at the inflation rate today versus what it was six months or a year ago, we’re in much better shape now than we were then. Is raising rates the perfect tool for (taming inflation)? Perhaps not, but it’s had the intended effect of slowing down the economy and bringing inflation down significantly.
Do you think there will be a recession or a soft landing?
It’s either going to be a very, very mild recession or a soft landing. Certainly, different industries have felt the brunt of it differently. Housing is one that has been in recession and probably will be for the next several months.
What can change this financial picture?
Some of the geopolitical things have helped moderate some of the increases, frankly, with the flight to safety. There are things that could happen outside of the Fed that could influence the mortgage market. What’s happening with Israel actually could help moderate rate increases, but there’s some speculation that if it causes an oil spike with unrest over there, as well as what’s going on in Russia, that could actually feed inflation, meaning interest rates stay higher for longer. ●