The Fed Raised a Quarter Point — So Why Did Mortgage Rates Go Down?

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Today's topic: the Fed's quarter-point hike

Welcome to Mortgage Mom Radio. I'm Debbie Marcoux, the Mortgage Mom, and every week I bring you updated information about all things real estate and mortgage. Today we're talking about the Fed. They had their two-day meeting — it started yesterday and ran through today — and they ultimately came out and said they are increasing the federal funds rate by 25 basis points. That's about a quarter percent. So what did the Fed have to say about it, why was that their decision, and what does it mean to you? Where are you going to feel more of a pinch than you've already been feeling, and what does it do to mortgage rates?

This is an interactive show. Put your questions in the feed — anything at all to do with mortgage or real estate. Should I sell my home, should I buy a home, what are good investments right now. I'm happy to read the question out loud and answer it.

Q&A: is a second home a good investment now?

Karen asks: “Is a second home a good investment now, especially in an area of growth?”

Fantastic question. Buying any real estate whatsoever is always a great investment — but real estate is for the long haul. It is not a short-term quick flip, unless you're a contractor buying something cheap because it isn't habitable, making all the changes, and turning it around. For the majority of us who can't do that, it's a long hold. So make sure that whatever you're purchasing, the monthly payment is something you know you can always take care of, whether you put a renter in it or plan to use it as a vacation property. You just need to be budgeting appropriately.

I actually think right now is a great time to buy. Inventory is very limited, but with so many people concerned about where interest rates are, there are a lot fewer people out actively seeking properties. So it's a little bit easier right now to get an offer accepted, get a great price, and get some seller concessions to help offset closing costs.

Think of it this way. Instead of putting money into a college plan or a retirement plan when you have a baby, what if you invested it in a property? You buy a property, you put tenants in it, the tenants make the payment and cover the mortgage for you. Yes, it costs you something for upkeep and maintenance. But over an 18-year term — and again, long haul, real estate goes up and real estate comes down, that's the cycle — what's that home worth? You've probably got a good amount of equity, and your renter has been offsetting your payments the whole time. Now your child is ready for college. You can borrow against it for cash, or sell it and buy them a property near the college town, and rent the other bedrooms to other students. There are so many directions you can go with it.

It is never a bad time to buy, but I think we're in a great spot right now. My own speculation — and I can be totally wrong — is that we'll see rates come down in 2024, and you always have the opportunity to refinance. But when rates do come down substantially there will be far more people out making offers, and that creates competition, overbidding, and no more seller concessions. So I think 2023 is a great year, and if buying is something you've been thinking about, I'd start to pursue it.

Q&A: nine hikes in a year

Michael asks: “The Fed raised rates a quarter point, the ninth time in a year, to balance inflation. What are your thoughts?”

I understand why they're doing it, and I understand the thought process. The only way they can curb inflation is to bring rates up. I personally feel they did it way too fast. I think that's why we're seeing the banking problems in the headlines. I think they just went too fast — but I do understand the intentions.

One positive: the anticipation going into the March meeting was a half-point increase, and they backpedaled and raised only a quarter. I'm hoping that means they're seeing the effects of what they've done and are trying to slow the train down. I also heard them talk about possibly starting to cut rates in 2024, and that was part of Chairman Powell's press conference today. He did say they anticipate continuing to increase — they don't know for how much longer, they don't know the end point, but their goal is to get inflation down to 2%.

I just think they went too fast. It took everybody by surprise and leveled everybody. It was like running into a glass door — you didn't see it there, and all of a sudden, boom, we all got hit with much higher credit card bills, higher monthly payments on our equity lines, higher rates on new cars. That slows down car purchases, recreational purchases, personal loans. It hurts banks. It raises CD rates so savers get more interest, but banks lose out on treasuries and bonds. My personal opinion: too fast. But I understand why, it is what it is, and we're all going to make it through this, I promise.

Q&A: when do they stop?

A listener asks: “Do you think the Fed will continue raising rates? When will they stop?”

I do think we'll see at least a couple more increases. How much each time is a big question mark — it depends on the inflation numbers and how hard they need to push. My guess is probably two or three more. Again, that's my opinion. I'm not a financial advisor, nobody has a crystal ball, so don't hold me to it. But based on my research and staying on top of the news around this, that's what I'd anticipate.

Q&A: will home prices come down a lot?

Russell asks: “Will home prices come down a lot?”

Great question, and again, no crystal ball — I can only tell you what I believe will happen. I've been in this industry since 1994, so I'm giving you information based on what I've witnessed and been through.

I don't believe home prices are going to drop much further than they already have. Every city, county and pocket is different, but what we're seeing across the U.S. as a whole is an amazing shortage of properties actually listed for sale, and that shortage makes it very difficult for values to drop. Even though rates are up and homes are less affordable, sellers don't have a lot of competition, so they don't necessarily need to drop the price to get an offer. We've been seeing homes right here in Southern California go on the market Thursday with six offers by Monday.

It depends on the price band — the higher end, the lower end, condos and townhomes, single family, and the average price range for your city. In that average range, if the home comes on the market listed right and in great shape, inventory is moving.

What we've been seeing for about the last six months, and more so since the beginning of this year, is that rather than reducing the price, sellers are offering incentives — helping with closing costs, buying down points to get the buyer a better rate, making the home more affordable. And here's what that does to the comps: the closed sale shows on Realtor.com or Redfin or Zillow at the higher price. If the home was $400,000, it shows as closing at $400,000. It does not show you that the seller gave $8,000, $10,000, $12,000 back to the buyer toward closing costs. We're seeing a lot more of that right now than big price reductions.

I know Arizona had a bit of a drop in value at the end of last year, but I don't believe they've seen huge swings in the last couple of months. And going into the spring buying season — when most people start looking again, hoping to move over the summer once school ends in June — with more people actively looking and inventory this low, I don't think we see a big drop of any kind. Again, my opinion. I'm not a financial advisor.

Q&A: foreclosures like 2010?

Russell also asks: “Do you think there will be a lot of foreclosures like in 2010?”

I do not believe that's going to happen. We pull the lists all the time — it's something my team stays very tight on. We're constantly watching and pulling lists of homes going into foreclosure, and lists of people in default, maybe 90 days behind with 90 more days before a foreclosure is issued. We're not seeing those numbers come to market.

Remember that the majority of homeowners who owned before June 2022 have a lower interest rate than where rates are today, which makes their home more affordable than what they could rent for. If they lost the house and had to go rent, they'd pay more. They have a lower monthly payment than if they sold and tried to buy something else. That's why inventory is low, that's why people are holding on to their homes, and that's why it makes sense that even when funds get very tight — you might lose your job — you're going to do everything you can to scrape together the money to keep the mortgage paid. You can't rent any cheaper and you can't buy anything cheaper.

We've been watching very closely ever since the pandemic, thinking that could have started a waterfall, and that waterfall just hasn't started. I believe that's the contributing factor as to why.

A licensed real estate agent and lender on Debbie's team, watching the show, wrote in and Debbie read her answer aloud:

“We are not anticipating a rise as we did then, simply because buyers now go through a much more stringent loan process — no stated income loans.” We do have some stated-income programs, but very few and far between. “And current homeowners now have lower payments and lower rates, and they are able to afford their home, or they can rent the home for equal to or more than their current payment. We do anticipate some increases in REO activity, but not as expected.” So she agreed with me. With any kind of turmoil we'll see some of that come to market, but we're really not expecting a ton of foreclosures to flood our market.

Q&A: will the big iBuyers dump their houses?

Russell asks: “What about the big listing companies that bought all the empty houses — do you think they'll start dumping them cheaper?”

My answer would be no, not right now, while properties are holding. A lot of the properties I saw them purchase, they've actually rented out — when values started to decline a bit in the third and fourth quarter of 2022, rather than sell at a loss they put tenants in. My guess is they hold the portfolio until it's time to remarket and resell. It wouldn't make sense to take rents on those properties and then sell at a loss.

And yes, they're big companies, but they are not big enough to create a tidal wave within the industry. Think about how many millions of people and how many millions of homes there are in the United States. Sure, they have a very big portfolio, but it isn't big enough for those particular companies to make a tidal wave in the market. That's my opinion; somebody else may disagree.

Her team member added: “Yes, we do see these companies listing the homes, and I have seen them list for the same as purchased or a little lower. They are a business, so if they take a loss it will affect them differently. Also, a lot of these companies are renting the homes.” That's exactly what I just said. They know their portfolios, they know which ones should go to market quickly and possibly take a loss, and when they purchase they're already working potential losses into their numbers.

The state of the housing market, by the numbers

Debbie read from an article she had printed during the break.

The U.S. housing market has been in dramatic flux since 2022 — plagued by oppressive inflation, soaring rental prices, higher mortgage rates, and swelling demand made worse by a shortage of housing inventory. So, everything I just talked about. The continued influence of the pandemic has also reshaped where we live: since 2020, remote work has had many former homeowners from northern metro areas permanently setting up camp in Florida and elsewhere in the Sun Belt, driving up housing prices in once-affordable cities. Average home prices in Tallahassee, for instance, surged by over 30% year over year, according to Redfin data from February.

According to the National Association of Realtors, in January of 2023 sales of existing homes fell for the twelfth consecutive month. Last week also marked the sixth in a row that the 30-year fixed rate saw a hike, hitting 7.03% last Wednesday. This week is a different story: with the fallout of Silicon Valley Bank impacting the market on Monday, mortgage rates dropped to 6.5% and are now hovering slightly higher.

The median existing home price for all housing types in January was $359,000, an increase of 1.3% from January of 2022. I hope you all heard that. Home values actually went up on average across the United States, during a time when we were all anticipating massive declines — the bomb dropping, every renter waiting to catch that deal — and interest rates were higher.

Pending sales, which lead existing sales by one to two months, look promising: up 8.1% from December. In terms of new builds, the National Association of Home Builders reports sales are down 19.4% compared to a year ago. Part of why that number is down is that there aren't as many new builds available — we've talked about this in previous shows, a lot of builders have sort of taken a break from starting new developments, pulling permits, and getting developments under construction.

I don't see us having any kind of massive fallout during a time when inventory remains at all-time lows.

Q&A: how soon can I refinance?

A listener asks: “If I purchase a home now at a higher rate, how soon can I refinance if it drops?”

Great question. The majority of loans — I'd say 95% of the loans people obtain — have no prepayment penalty whatsoever. On a conventional loan you could refinance the day after you close on your purchase. You could start a brand new refinance and close 30 days later with no penalty. FHA is the same idea; VA is a little bit different.

That assumes you're refinancing only the balance you took when you purchased. If you're trying to get cash out, that's a different story — there are longer waiting periods. Using a higher value on your property means waiting periods before a brand new appraisal can be used after purchase.

But if you're getting a normal conventional, FHA or VA loan and all you're doing is refinancing to drop your rate, there are no prepayment penalties and you could start as soon as you want.

There are some loans — non-qualified mortgages, stated-income types, debt service coverage ratio loans for investment properties — that can and sometimes do come with a prepayment penalty. That doesn't mean you can't refinance right away, but you would pay the penalty. So if you're looking at a stated-income or investment loan where you're not verifying your income, ask your lender whether there are prepayment penalties. That's very important.

Reading the Fed's press release

Now to the Federal Reserve. I want to read you the press release exactly as it was given, and then we'll talk about what you can anticipate from it.

“Recent indicators point to modest growth in spending and production. Job gains have picked up in recent months and are running at a robust pace. The unemployment rate has remained low. Inflation remains elevated. The U.S. banking system is sound and resilient. Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring and inflation. The extent of these effects is uncertain. The committee remains highly attentive to inflation risks.”

If you're not quite following: they're saying the U.S. banking system is sound and resilient — no problems. We've seen some problems, but they're saying there aren't any. Okay. And that recent developments are likely to result in tighter credit conditions for households and businesses. What does that mean? It means they're going to tighten credit guidelines for you to qualify to take on more debt. They could lower debt ratios so you don't qualify for as much. You might apply for a credit card and find you don't get approved, where before it might have been easier. They'll make credit conditions for the banks more stringent as well, to head off anything that could become disastrous later.

I love how they throw in that the committee remains highly attentive to inflation risks. So they're going to tighten us up on credit, and they expect that to slow hiring — which contradicts what they just said about robust job gains. That's how I'm reading it. Sorry if I'm being a little cynical here. I just think they went too fast. I wish they'd brought us up slowly and let people adjust and get comfortable. But hey, who am I? I'm not the chairman of the Federal Reserve.

“The committee seeks to achieve maximum employment and inflation at the rate of 2% over the longer run. In support of these goals, the committee decided to raise the target range for the federal funds rate to 4.75 to 5%.” There's the quarter-percent raise. “The committee will closely monitor incoming information and assess the implications for monetary policy. The committee anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time. In determining the extent of future increases in the target range, the committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities as described in its previously announced plans. The committee is strongly committed to returning inflation to its 2% objective.”

Basically: they raised a quarter point, they were going to raise a half, and they feel this is the best direction to continue moving toward 2% inflation, which is the end game. Do I think we'll see more job loss? Yes. Do I think we'll see more tightening and higher bills? Yes.

Which of your debts change overnight

Mortgage rates — whether it's a VA loan, a conventional loan, an FHA loan, a jumbo, or a non-prime, non-QM type of loan — are not directly connected to the federal funds rate. That's very important to understand. Do the Fed's announcements have some correlation? Yes. But they are not directly connected. So because they brought that rate up a quarter percent today does not mean the rate quote you got yesterday is a quarter higher today. That is not at all how mortgages work.

Home equity lines of credit, credit cards, and short-term loans like car loans and personal loans are directly connected to the prime rate. If you have a credit card balance at 23% — which sounds high, but is probably pretty close to what you have, and if you haven't looked at your statement in a while you should pull it — that percentage is going to change overnight and go up a quarter percent immediately. You're paying more interest on the debt, and the minimum monthly payment calculated by that credit card company increases. So your out-of-pocket every month, and your budget, change.

Home equity lines are exactly the same. If you took a HELOC yesterday, it's a quarter percent higher today. If you took one a year ago, across nine increases you've probably seen significant changes in your minimum monthly payment — and you'll see it go up again.

Short-term loans like car loans: when you walk into a dealership and apply for new financing, the rate is going to be higher than it was. If you already have a car loan, that rate is fixed and your payment is fixed — it will not increase. But think about what it does to the car industry. It has gone from people walking in and getting 0%, 1.99%, 2.99% to having to tell people the rate is 6.75%, 7%, or 9% depending on credit. That slows down purchasing, which slows down sales, which hurts that industry, which is where we see less hiring and more layoffs. I do think our job market is going to weaken, and that's an example of how their changes affect the things in that statement I just read you.

Q&A: is low inventory the only thing holding prices up?

A listener asks: “Is the lack of housing inventory about the only thing keeping house prices fairly stable with all these interest rate hikes?”

Yeah — I do believe that's the main factor. If there's no inventory and you've got people who need to move, then more people are going after the same property. Maybe it's the only house in the entire community where that buyer really wants to live, because they want that school district, or their family lives in the area, or they're being relocated for a new job. If you're one of the only homes listed in the community that buyer wants, it's a lot easier not to have to reduce your price to find someone willing to buy.

What we are seeing is a lot of sellers offering concessions, because they also need to help buyers afford the property at those prices. What they're ultimately doing is helping the buyer get the interest rate back down to where it was before the Fed increases. If a seller pays two points — two points is 2% of your loan amount, so on a $400,000 loan that's $8,000 — the buyer can buy the rate down. Depending on the loan type, on FHA or VA they could definitely get into the mid-to-low fives. On a conventional it's possible to get down around 6.25% to 6.5%, maybe lower.

It's not unheard of. I've seen sellers pay two to three points. I've seen a buyer come in and pay an additional point. I have a client right now paying one point on top of the seller's three points — so it's only costing them one percent, they paid what the seller wanted for the home, and we're locking them in on a VA loan today at 4.875%. That's a rate from before all the Federal Reserve craziness. That's something that buyer can tolerate and afford, and it also helps that seller keep prices in the neighborhood at their level.

Q&A: are the hikes actually helping inflation?

Heather asks: “It does not seem like this is really helping with inflation — are these rate hikes really helping?”

I can only tell you what I read, and based on what's being published, it is helping. How much of what they're publishing is a smokescreen, who knows — I can't answer that. But they have started to bring inflation down by doing this, so it has started to make a dent. Has it made a fast dent? Absolutely not. Is it going to take longer than the Fed thought? Yes. So strap yourself in, it could be longer than expected.

That was talked about during the press conference today: we're going to do this for as long as we need to. The hope was that by the end of the first quarter they'd be done increasing and would just hold rates high for a while. Now it looks like they'll probably have to continue increasing more times this year. They'll never tell you how many times and they'll never tell you how much. But based on today's press conference and the reports, I'm guessing another two to three increases, then a hold, and maybe by mid-2024 we start seeing them cut back a bit. That's today — it could absolutely change.

Q&A: new tax deductions or credits for buyers?

Michael asks: “Will there be any new home buyer or homeowner tax deductions and credits for 2023?”

If you're asking whether the government is going to come out with additional tax deductions or credits for buying a property — which I think is where you're headed — the answer is a big question mark. I can't answer that. I haven't read anything or seen anything on it. That doesn't mean it might not exist; maybe somebody is speculating that it could happen. But I've seen no official reports and no documentation that would lead me to believe that buying a home in 2023 gets you some additional tax deduction or credit from the government.

Why mortgage rates improved after the hike

As I mentioned, mortgage rates aren't directly connected to the federal funds rate. They're connected to Fannie Mae 30-year notes, Treasuries, and mortgage-backed securities, and we move a lot like the stock market — announcements can make it good or bad.

The press release came out at 11 a.m. Pacific, and the press conference was at 11:30. So it's been about two hours — and within those two hours we've actually seen interest rates start to gain some momentum. They're getting a little bit better. Why would they get better after the Fed said it was raising rates a quarter?

Because prior to the bank fallout of the last couple of weeks, everybody was building the anticipation of a half-point increase into the rate sheets we've been quoting and locking you on. The Fed came out and said we're going to slow it down, give you a second to breathe, and only increase a quarter. That sparked a bit of a rate rally. How long it lasts I can't tell you — rates change every day and the market moves all day long — but based on the hourly updates I get on the mortgage markets, we appear to be getting a little bit better, because we didn't get as big an increase as anticipated.

I mentioned in last week's show that we were in a bit of a sweet spot for getting a really great rate. Right now rates are the lowest they've been since January, and we're very close to the lowest levels we've had since October of 2022. January was slightly better than today, but we're almost back at that level, and January was the best we'd had since October 2022.

If the Fed continues to increase throughout the year, then as we get closer to each Fed meeting, the market starts building in the anticipation of the next increase, and rate sheets go up a little. So we are at a very nice sweet spot right now. It's a very good time to get your rate locked in, a very good time to get your financing started, and a very good time to get out and start looking at homes — and get something this year, instead of waiting until next year when they start to cut rates. That really will bring out the herds of people trying to get into a home, and you'll get lost in that stampede like many of you did during 2020 and 2021.

Wrap-up

I hope I made it easier to understand what's happening as you're hearing all of the headlines and your phone is popping up with news articles. Give us a call — we'd love to help you with your financing, that's what we do for a living. Call my office at 844-935-3634, that's 844-WE-LEND-4, or head over to mortgagemomradio.com. Don't forget the “radio” or you won't end up in the right spot.

And if you want to be part of the show live, text the word MOM to that same number. It's one text message a week — not spam, just a link — so you know when I go live every Wednesday right around one o'clock Pacific and can put your questions straight into the feed. I hope you join me again next Wednesday. Have a great rest of your week, stay dry, and we'll be back.