By Julian Hebron, The Basis Point
No wonder lenders and consumers are spooked. 2022 rates began at 3.25%, peaked at 7.375% near Halloween, dropped to 6% in early February 2023, hit 7% by late February, and are now near 6.5%. What a ride. Do we get a spring homebuying bump now? Can the Fed beat inflation in 2023? Even if they do, are we just in a higher-rate era now? Can people even afford today’s home prices? And most important, what can all you lenders do about it? Let’s take a look.
Rate Volatility Recap January to March 2023
Let’s recap the wild rate ride in 2023 so far:
Rates dropped from 6.5% to 6% in January on optimism that the Fed’s rate hike medicine was going down, and inflation with it.
By February 2, Groundhog Day, 6% mortgage rates and lower home prices (see ‘Upside’ section below) gave some life to budding Spring homebuying.
But Punxsutawney Phil saw his shadow that day, and wintry rates rose back to 6.5% in a week.
First, it was January’s super strong jobs report on February 3. Then Fed chair Jay Powell and FOMC voting member Christopher Waller reminded markets, “we will stay the course until the job is done” on February 7 and 8.
By February 24, rates approached 7% when January Core PCE inflation – the Fed’s preferred measure – rose 20 basis points to 0.6% for the month. That’s 7.2% annualized!
Rates hit 7.125% by March 3 but dropped to 6.75% on March 10 as wage inflation eased.
Rates dropped further as the bank crisis drove investors into the safety of mortgage bonds, and entered the last week of March near 6.375%.
What’s the Inflation & Rate Endgame for 2023?
Now, the Fed is balancing fights against inflation (higher rates) and bank contagion (lower rates).
On inflation, all major institutions have updated projections.
For example, Goldman Sachs now predicts year-end CPI at 3.8% (it’s 6% now) and Core PCE at 3.4% (it’s 4.7% now).
So, for now, the Fed’s 2% target feels less likely. Rate volatility is the only certainty in 2023.
Rates will rise if we get inflation surprises from Core PCE (March 31), wages (April 7), and CPI (April 12).
Rates will drop if inflation wanes, or if bank contagion tips off a recession.
The Fed has a nearly impossible job, and bank panic was in part tipped off by the Fed hiking too fast.
It’s caused net interest margins to invert for many banks and led to balance sheet issues for a few banks.
The Fed proceeded with a ninth straight hike on March 22, but markets are now betting on a pause for their May 3 rate policy meeting.
So what does this mean for homebuyers?
The Upside of Slower Home Sales 12 Straight Months
On March 21, we got February data saying existing home sales snapped a 12-month losing streak, rising 14.5% to 4.58 million units.
This reverse comes after rates hit the low-6% range during January, which is when people got into contract for February closings.
The upside of existing home sales slowing for a year:
Median existing home prices are $363,000, down $50,800 from a June 2022 peak of $413,800.
Monthly cost on a $363,000 home purchase with 5% down and a 6.5% rate would be $2881 (mortgage payment, insurance, taxes, mortgage insurance).
If your borrower had no other monthly debt, they’d qualify making $80k per year. If they had $600 in credit card, auto, and other monthly debt, they’d qualify making $97k per year.
Newly built homes also have lower prices, with today’s $438,200 median sale price down $58,600 from the October peak of $496,800.
Monthly all-in cost on a $438,200 home purchase with 5% down and a 6.5% rate would be $3456 (mortgage payment, insurance, taxes, mortgage insurance).
If your borrower had no other monthly debt, they’d qualify making $96k per year. If they had $600 in non-housing monthly debt, they’d qualify making $113k.
How to Warm Up Deals When Headlines are Coldest
There are millions of homebuyers who can afford these 43% debt-to-income ratio scenarios.
The Mortgage Bankers Association predicts 4.84 million new and existing home sales in 2023, of which 69% will be financed by you.
I present these scenarios at 6.5% because that’s the rate market reality today.
But rates with a 6 handle have so far proven more palatable for buyers and sellers. That’s when we can see weekly purchase loan applications rise.
So the playbook is long lead engagement.
First, you must “be the media” and use your marketing system to stay in front of customers with real-time market data on rates and local home prices.
Second, you must remind borrowers that home price declines will stop and maybe reverse as rates dip to 6% and below.
So getting pre-approved now, and making aggressive offers is the best path to success – and the first time in years that sellers are willing to make deals. Even with recent home price declines, sellers still gained $3.5 trillion in tappable equity from January 2020 to present.
Third, you must use customer intelligence to keep pre-approved borrowers from straying during their shopping process. Real-time alerts tell you if your sellers have listed their home, if your buyers have talked to other lenders, and let you re-engage all your clients to get them into their dream home.
Fourth, you must help your realtor partners engage these long-lead borrowers and do so in a compliant way.