Historical Insight: Mortgage Rate Moves Are Independent And Can Turn Quickly

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The rapidly climbing 4% mortgage rate to 7% has raised concerns about the housing market. However, the residential real estate market produces cycles of its own, even going counter to the stock and bond markets. This independence comes from paying attention to the supply and demand of new and existing homes.

Then there are real estate lenders. They are important because most purchases benefit immensely from long-term loans. The health and price strength of housing (collateral) and loan quality of borrowers (along with existing employment factors) are important factors in lenders’ willingness to provide mortgages.

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The mortgage rate is where Wall Street comes in. As with most mortgage-selling lenders, current interest rates and investor demand determines the rate offered.

Looking Back to Understand Today’s Mortgage Rates

Because real estate cycles can be long and have different characteristics, looking at history is a good way to address the question, “Where are mortgage rates going next?” So, below is the monthly graph starting from 1950.

Why so far behind? Because the early 1950s had a good economy with stable, low inflation and bond yields. Housing and commercial development were performing well in this post-war period. Residential mortgages started the decade at around 4%. Then came the rising inflation.

The first place to look is the 1959 circle where the rate first rose to 6% – the equivalent of today’s mortgage rate. The level was significant because investors historically considered the 6% yield for long-term bonds to be safe. However, 1959 home buyers considered that rate to be extreme. Therefore, the 6% rate failed to stay in the 5-1/2% zone for the next six years.

Then there was a 6% success without fanfare, followed by four consecutive years of rising red zones – an unheard of 9% to 10% level. Does this mean that today’s rates could even reach that level? Maybe not. This significant 4% increase started at 5-1/2%. Today’s 4% increase started from 2-1/2% to 3%. Each increase was particularly noteworthy, especially because of the speed today. Because such moves increase investor interest (higher money supply) and home buyer anxiety (lower money demand), the increase will inevitably run to a limit.

Countering a history of high inflation

After hanging at the lower-7% level, the rate rose again – this time to 10% five years after it first hit the 9% to 10% level. Again, however, it fell back, but only to the level of 9%.

Finally, four years later in 1979, when the rate of inflation and hyperinflation became of great concern, the rate easily broke from 10% to a rapid increase, which was seen to be 18%.

Using That History for Today’s Mortgage Rate Environment

First, today’s 7% level by comparison to a comparable 20-year level gives no clue when rates were falling.

Relevant is that a run-up of up to 7% is comparable to the size discussed above. The difference is high speed. Importantly, neither the size nor the speed foreshadow the forward movement. Instead, as has happened before, the head ends abruptly and turns upside down. Why? Because, while borrowers are twitching their hands, the appetite of lenders and investors has waned. Additionally, everyone involved in the sales process devises strategies that help counter buyers’ concerns (for example, lower down payments, adjustable mortgage rates, and lower front-end rates). Finally, there is the powerful force of competition among lenders.

There has also been a change in the attitude of potential homebuyers and tenants in this market. Those previous non-buyers may have a change of heart. If so, they would welcome a less frenzied market, where homes sit for a period of time and prices fall back from their rapidly rising highs. High Mortgage Rates? As in previous periods, homebuyers are focused on buying a home, so they will be prepared to deal with the conditions that exist – to obtain a low-cost mortgage while running the risk of re-increasing home prices. for non-home owners. ,

two great articles from wall street journal Describe how conditions have changed: First, how the market is better for home buyers, Second, what’s the renter boom like? start to bust,

Bottom Line – The Real Estate Market Is Different From The Investment Markets

Don’t take that 7% mortgage rate as a fixed income bond selloff. Higher rates are not a move to higher rates. It is an invitation to do something for all the participants.

That’s the residential real estate market at work. The suppressed demand for houses still remains. There should be a way to get the desired homes in the hands of home buyers. This is the business of everyone involved in the industry, so have faith that good things will happen in the housing market.

A very important difference between investors and home buyers: Investors panic when prices drop; Home buyers are excited. So, it is good news that home prices are falling now.

Credit: www.forbes.com /

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