IT’S MAY, WHY ARE RATES GOING UP?

For homebuyers, inflation can make homeownership less affordable. Inflation also means the dollar loses value. What you could buy with $5.00 in 1990, will now cost you $9.45. Wages aren’t growing as quickly as prices increases, therein lies the problem.

Although inflation numbers are improving, mortgage rates are increasing which is the opposite expectation we’ve had based on historical data. Let’s take a look at exactly what’s happening.

Here’s a hint we went over in detail during my last webinar: supply and demand.

Mortgage rates are impacted by supply and demand in the bond market. In 2020 and 2021, commercial banks in the US were buying a large amount of bonds. In 2020, there was an increase of 23.1% in bonds purchased by the banks. In 2021,it was 22.8%. As of April 2023, bond purchases are down by over 12%. Demand for bonds have decreased.

In 2021, due to the large amount of bonds being purchased by banks, the bond market was stable although mortgage rates should have been increasing with inflation. At the end of the QE (quantitative easing) period, mortgage rates jumped, back in line with the rate of inflation. Essentially, the trend normalized. The Feds were buying a lot of bonds during the QE period to boost growth. This process increases the money supply and reduces borrowing costs, encouraging banks to lend more. When banks lend more, the economy grows.

As the Fed continued its bond-buying, bank reserves began rising again, but not nearly as fast as the pace of the bond-buying. The Feds continued to buy bonds through May 2022 which is exactly why inflation got out of control. They continued to increase the money supply despite indicators that inflation was rapidly rising and bank reserves weren’t keeping up.

On April 6th, the FDIC seized SVB and Signature Bank’s bonds and announced that they’d be selling them. Banks that have to raise capital to meet their depositors' demands are also selling bonds.

Let’s say you had a bill due for a car note, and you didn’t have savings, you’d have to sell some of your assets to raise money and cover the note. That’s why the bonds are being sold. To raise capital. The increase in the bond supply drives prices down, and mortgage rates up.

Instead of getting the relief in mortgage rates we expected with the improvements to inflation, we are seeing the opposite. This is due to the regional banking crisis.  The devil is in the details.

“Treasury Secretary Yellen tells bank CEOs that more bank mergers may be necessary. The regional bank crisis is not only accelerating movement of deposits, but also the consolidation of banks. Total bank count in the US is down 90% over the last 100 years to 4,100. After this crisis, a few banks will control almost all US deposits.”

WILL THE UNITED STATES DEFAULT?

The news circulating regarding the debt ceiling is exactly why The Truth Behind The Headlines webinar was born. The news is confusing, on purpose. It more of a narrative than it is the information we need to make smart choices.

Speaker of the House McCarthy says "Biden wants to default more than wanting a deal."

A few days ago, a deal on the debt ceiling was expected to be made by the end of this week. The ceiling was reached in January. Suddenly, negotiations are moving backwards and the US is less than 9 days away from a potential default. If the US were to default, the stock market would tank by about 50%, and the value of the dollar would drop significantly. The global community of investors would lose confidence in the US and the dollar. Worst of all, mortgage rates would skyrocket, again. The Fed’s efforts to slow the economy and drive inflation down would be completely undermined.

What’s the likelihood of default? Slim to none. Here’s why:

• The debt ceiling has been modified 102 times since World War II

• A default would be unprecedented, it’s never happened before

• Since 1960, Congress has raised, extended, or revised the debt limit 78 separate times. In each of those instances, Congress took action on the debt limit before the nation defaulted.

• The 14th Amendment in The Constitution gives the Treasury Department the ability to keep borrowing money beyond the limit.

• Congress voting against the lift in the debt ceiling would send us backwards in the fight against inflation.

RECESSION ON THE WAY?

Deutsche Bank says 200 years of US data indicates a severe recession on the way. They’re predicting 100% chance of a recession. With banks crashing on the largest scale since the 1930s and the money supply rapidly decreasing, we have a big problem on our hands. In the 1930s we didn’t have the Federal debt we have now. For example, Federal debt was less than 20% of the GDP in the 1930s vs. more than 100% today, and projected to grow further. Federal debt drains resources out of the economy and supports increased tax rates. Government spending leads to tons of problems, as voters and tax payers, we should pay close attention to how the government will handle this.

Falling household savings, higher costs in lending, rising consumer credit (debt), and slow wage growth could impact real estate sales negatively.

You can bet that rate hikes on the scale at which we’ve seen in the past few years will lead to a recession. During inflations, people lose their jobs, consumer purchases decline, businesses go bankrupt, and people are at risk of defaulting on their debts. The current headlines make it pretty tough to spend without caution.

WHAT TO LOOK FOR THIS WEEK

• New Home Sales data - Tuesday

• Treasury Secretary Yellen speaks - Wednesday

• Fed meeting minutes - Wednesday

• Q1 2023 GDP data - Thursday

• PCE inflation data - Friday

• Total of 5 Fed members speak

When Fed members speak, the markets react. This week, expect more volatility and confusing headlines as we get through the debt ceiling negotiations. More to follow!

Article written and provided by Padi Goodspeed of Cross Country Mortgage