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Mortgage Spreads and the Housing Market: What Homebuyers Need to Know
Introduction
Lawrence Yun, the chief economist for the National Association of Realtors, has expressed concerns about the mortgage market and its impact on homebuyers. While the Federal Reserve's interest rate hikes have been a hot topic, Yun believes that the bond market and the widening spreads between treasuries and mortgage rates are the real problem. These spreads are currently at historically high levels, which is keeping mortgage rates high and making it difficult for homebuyers, especially first-time buyers, to enter the market.
Why Mortgage Spreads Should Move Lower
Mortgage spreads tend to widen during times of economic uncertainty, such as before a recession. However, with recent positive economic news, it is logical to expect these spreads to narrow. This would provide relief to homebuyers who have seen affordability decline since 2020. The widening spreads in the past year were largely driven by the expectation of rising 10-year treasury yields and fears of a recession. However, these cases are now fading, with inflation rates dropping and economic growth estimates improving.
Inflation and Economic Growth Outlook
The recent inflation report showed that consumer prices rose less than expected, indicating low inflation rates. This is expected to persist due to lagging government measures of housing inflation. Additionally, the Atlanta Federal Reserve Bank's estimate of second-quarter economic growth suggests that early predictions of a recession in 2023 were incorrect. These positive indicators should contribute to a narrowing of mortgage spreads and lower mortgage rates.
Potential Savings for Homebuyers
If the spread between 10-year bonds and mortgage rates were to return to normal, homebuyers could see significant savings in monthly payments. For example, on a $500,000 mortgage, a 2 percentage-point drop in the spread would result in a monthly payment reduction of $393. This could make a significant difference for homeowners and potentially attract more buyers to the housing market.
The Role of the Federal Reserve and Banks
The Federal Reserve is expected to raise interest rates further, which could support treasury yields. However, the Fed has also stopped buying mortgage securities, reducing the value of mortgages in secondary markets. This puts pressure on lenders to demand wider spreads from borrowers. Banks may also seek larger spreads on loans made in the coming months due to the risk of quick repayments when borrowers refinance as rates fall. The Fed's focus on controlling inflation may also limit its desire to see mortgage rates fall.
The Impact on Mortgage Rates
The expectation from Fannie Mae is that mortgage rates will stay near current levels through 2023. However, the Mortgage Bankers Association of America predicts a dip in the 30-year rate next year. The response of banks to changing spreads is uncertain, as they would have to balance the risk of prepayments with the potential increase in the value of mortgages they already own. If banks respond to rising mortgage-bond values by relaxing spreads, mortgage rates could come down quicker than expected.
Hot Take: How Mortgage Spreads May Impact a New Business
The widening mortgage spreads and their impact on the housing market have significant implications for not only homebuyers but also for new businesses. As mortgage rates remain high, it becomes more difficult for individuals to enter the housing market, especially first-time buyers. This reduced affordability has a trickle-down effect on the overall economy, including the prospects for new businesses.
One key aspect is the potential savings for homebuyers if the mortgage spreads were to narrow. A decrease in mortgage rates due to narrower spreads could result in significant monthly payment reductions, freeing up more disposable income for homeowners. This increased financial flexibility can lead to increased consumer spending, which can benefit small businesses.
Moreover, a more accessible housing market creates a conducive environment for new businesses. As more individuals become homeowners, the demand for goods and services related to housing, such as furniture, home improvement, and interior design, is likely to increase. This creates opportunities for entrepreneurs to establish businesses catering to these needs.
Additionally, lowered mortgage rates can boost consumer confidence and investment in real estate. This increased investment can spur economic growth, leading to job creation and a positive environment for new businesses to thrive.
However, the impact of mortgage spreads on new businesses is dependent on various factors, including the actions of the Federal Reserve and banks. The response of banks to changing spreads, their decision on loan rates, and the Federal Reserve's focus on controlling inflation can shape the borrowing conditions for entrepreneurs.
In conclusion, the widening mortgage spreads and the resulting impact on the housing market can indirectly affect new businesses. While there is hope for lower mortgage rates in the future, entrepreneurs should closely monitor these trends and be prepared to adapt their business strategies accordingly. By staying informed and agile, new businesses can position themselves to take advantage of potential opportunities presented by changes in the mortgage market.
Article First Published at: https://www.cnbc.com/2023/07/17/mortgage-rates-arent-sending-signal-homebuyers-need-on-affordability.html
