Mortgage rates affected by the banking crisis

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Mortgage rates – For the past couple of weeks, the United States has been ushered into a banking crisis, which in turn, has affected several industries.

Despite only being March, mortgage rates are already creating a headache for prospective buyers.

They can expect mortgage rates to go down through the rest of 2023 as the banking crisis continues, which could also cool down inflation.

However, there is also the possibility of some setbacks.

The Feds

According to Freddie Mac, the average rate for a 30-year fixed-rate mortgage topped out at 7.08% in November following a steady rise in 2022 due to the Federal Reserve’s attempts to curb inflation.

The average rate trickled down through January as the economic data suggested inflation was retreating.

However, strong economic reports in February raised concerns that inflation wasn’t cool as quickly or as much as projected.

As a result, the average mortgage rate climbed back up by half a percentage point over the month after it fell to 6.09%.

In March, banks started failing, which sent rates falling again.

Despite the decline, the Federal Reserve and the bank failures didn’t directly impact mortgage rates.

Instead, the rates are indirectly affected by the actions the Fed takes or is expected to take.

Other factors are the health of the broader financial system and uncertainty that could be percolating.

On Wednesday, the Federal Reserve announced another rate hike by a quarter point to combat high inflation while considering the recent risks to financial stability.

Analysts say that despite the bank failures complicating the Fed’s actions, if it’s contained then the crisis might have helped them by bringing down prices without resorting to more interest rate hikes.

The Fed suggested on Wednesday that it could be the end of the rate hikes.

Credit and rates connection

Mortgage rates have been known for tracking the yield on 10-year US Treasury bonds.

It moves based on three factors:

  • The Fed’s actions
  • What the Fed does
  • The investors’ reactions

When Treasury yields increase, mortgage rates also go up; when they decline, mortgage rates follow.

After the Fed’s announcement on Wednesday, bond yields and the mortgage rates that shadow them dropped.

However, it isn’t all bad according to Zillow senior economist Orphe Divounguy.

Divounguy pointed out that the relationship between mortgage rates and Treasuries have slightly weakened in the past few weeks.

“The secondary mortgage market may react to speculation that more financial entities may need to sell their long-term investments, like mortgage backed securities, to get more liquidity today,” he said.

Divounguy added that as Treasuries decline, tighter credit conditions from the bank failures could limit dramatic plunging of mortgage rates.

“This could restrict mortgage lenders’ access to funding sources, resulting in higher rates than Treasuries would otherwise indicate,” he said.

“For borrowers, lending standards were already quite strict, and tighter conditions may make it more difficult for some home shoppers to secure funding.”

“In turn, for home sellers, the time it takes to sell could increase as buyers hesitate.”

Read also: The Fed brings up interest rates for the 9th straight week

Rates expected to stabilize in the long run

Inflation remains high, but it is slowing down.

Analysts are projecting a slower economy in the coming quarters that could contribute to bringing down inflation.

According to Mike Fratantoni, the senior vice president and chief economist of Mortgage Bankers Association, it could be good for mortgage borrowers who can expect rates to retreat throughout 2023.

Inflation is expected to improve in the second half of 2023, which could lead to stable mortgage rates.

“Expectations for slower economic growth or even a recession should bring inflation down and help mortgage rates decline,” said Divounguy.

It could be good news for home buyers as it improves affordability and brings down the cost to finance a home.

Furthermore, it could benefit sellers by reducing the intensity of an interest-rate lock-in.

Lower rates could also convince homeowners to list their home to the market.

As the inventory of homes for sale are edging around historic lows, it would add much-needed inventory to a limited pool.

“Mortgage rates are steering both supply and demand in today’s costly environment,” said Divounguy.

“Home sales picked up in January when rates were relatively low, then slacked off as they ramped back up.”

However, the cooling inflation could bring the risk of job losses, another hurdle in the housing market.

“Of course, much uncertainty surrounding the state of inflation and this still-evolving banking turmoil remains,” Divounguy added.

On Wednesday, Fed Chair Jerome Powell said estimates of the cost of banking developments could slow the economy.

Regardless, the impact would reflect mortgage rates.

“Evidence – in either direction – of spillovers into the broader economy or accelerating inflation would likely cause another policy shift, which would materialize in mortgage rates,” Divounguy noted.