Housing Market Struggles as Mortgage Rates Soar

The Unexpected Effect of The Fed's Rate Cut

The Federal Reserve's decision to slash rates by 50bps in mid-September has had an unexpected effect. Treasury yields have surged dramatically, causing a stir in the market. There's a growing concern that this could be a 'policy error' or perhaps political pandering.

Impact on Main Street

The repercussions of The Fed's actions are not limited to Wall Street. Main Street is feeling the pinch as mortgage rates have rocketed back to recent highs. This has dampened the optimism that homeownership, a key part of the American Dream, was becoming more attainable.

Surge in Mortgage Applications

In anticipation of The Fed's rate cut, mortgage applications shot up after stagnating at multi-decade lows for months. This suggested that the housing market was rebounding and home affordability was improving. However, since the rate cut, mortgage applications have plummeted back to recent lows. This is due to mortgage rates soaring back above the 7.00% threshold.

A Tough Time for Homebuyers

The situation is challenging for prospective homebuyers. They are being buffeted by fluctuating mortgage rates and mixed messages about The Fed's actions. As a result, homebuyer confidence is at an all-time low, particularly when compared to homebuilder confidence.

The Double Whammy

The rise in rates has had a dual negative effect on homebuyers. It has made homes less affordable and discouraged homeowners from listing their properties. The scarcity of housing supply is being exacerbated by the so-called lock-in effect, where homeowners are reluctant to sell if it means taking on a higher mortgage rate.

Recession Fears

Scott Buchta, head of fixed income strategy for Brean Capital, suggests that a sub-5.5% mortgage rate is needed to revive the housing market. However, he believes this is unlikely to happen soon unless there is a recession. A recession is not a conducive environment for homebuyers to take on significant debt.

Overpriced Homes

The issue of high home prices is not new. Since the COVID lockdowns, home prices have skyrocketed even as mortgage rates have risen sharply. David Lampe, an agent with the Principal Team at Metro Brokers, notes that many homes are overpriced and undergoing multiple price reductions.

Waning Enthusiasm

Despite the challenges, there was a surge of enthusiasm among homebuyers in July, August, and September as rates were falling. However, as mortgage banker Shant Banosian points out, when rates start nearing 7%, it significantly impacts people's budgets. With rates now back above 7.00%, the enthusiasm is fading.

Another Rate Cut?

Given the recent surge in economic data, another rate cut by The Fed could exacerbate the situation by driving long-end yields and mortgage rates even higher.

Bottom Line

The current state of the housing market is a complex issue, with multiple factors at play. The Fed's rate cut, intended to stimulate the economy, appears to have had unintended consequences on the housing market. With mortgage rates soaring and home prices remaining high, the dream of homeownership seems increasingly out of reach for many Americans. What are your thoughts on this situation? Feel free to share this article with your friends and discuss. Also, don't forget to sign up for the Daily Briefing, which is available every day at 6pm.