How the Economy Impacts Mortgage Rates in Camarillo, California.

How the Economy Impacts Mortgage Rates

As someone who’s thinking about buying or selling a home, you’re probably paying close attention to mortgage rates – and wondering what’s ahead.

One thing that can affect mortgage rates is the Federal Funds Rate, which influences how much it costs banks to borrow money from each other. While the Federal Reserve (the Fed) doesn’t directly control mortgage rates, they do control the Federal Funds Rate.

The relationship between the two is why people have been watching closely to see when the Fed might lower the Federal Funds Rate. Whenever they do, that’ll put downward pressure on mortgage rates. The Fed meets next week, and three of the most important metrics they’ll look at as they make their decision are:

  1. The Rate of Inflation
  2. How Many Jobs the Economy Is Adding
  3. The Unemployment Rate

Here’s the latest data on all three.

1. The Rate of Inflation

You’ve probably heard a lot about inflation over the past year or two – and you’ve likely felt it whenever you’ve gone to buy just about anything. That’s because high inflation means prices have been going up quickly.

The Fed has stated its goal is to get the rate of inflation back down to 2%. Right now, it’s still higher than that, but moving in the right direction (see graph below):

2. How Many Jobs the Economy Is Adding

The Fed is also watching how many new jobs are created each month. They want to see job growth slow down consistently before taking any action on the Federal Funds Rate. If fewer jobs are created, it means the economy is still strong but cooling a bit – which is their goal. That appears to be exactly what’s happening now. Inman says:

“. . . the Bureau of Labor Statistics reported that employers added fewer jobs in April and May than previously thought and that hiring by private companies was sluggish in June.”

So, while employers are still adding jobs, they’re not adding as many as before. That’s an indicator the economy is slowing down after being overheated for quite some time. This is an encouraging trend for the Fed to see.

3. The Unemployment Rate

The unemployment rate is the percentage of people who want to work but can’t find jobs. So, a low rate means a lot of Americans are employed. That’s a good thing for many people.

But it can also lead to higher inflation because more people working means more spending – which drives up prices. Right now, the unemployment rate is low, but it’s been rising slowly over the past few months (see graph below):

No Caption ReceivedIt may seem harsh, but a consistently rising unemployment rate is something the Fed needs to see before deciding to cut the Federal Funds Rate. That’s because a higher unemployment rate would mean reduced spending, and that would help get inflation back under control.

What Does This Mean Moving Forward?

While mortgage rates are going to continue to be volatile in the days and months ahead, these are signs the economy is headed in the direction the Fed wants to see. But even with that, it’s unlikely they’ll cut the Federal Funds Rate when they meet next week. Jerome Powell, Chair of the Federal Reserve, recently said:

“We want to be more confident that inflation is moving sustainably down toward 2% before we start the process of reducing or loosening policy.”

Basically, we’re seeing the first signs now, but they need more data and more time to feel confident that this is a consistent trend. Assuming that direction continues, according to the CME FedWatch Tool, experts say there’s a projected 96.1% chance the Fed will lower the Federal Funds Rate at their September meeting.

Remember, the Fed doesn’t directly set mortgage rates. It’s just that whenever they decide to cut the Federal Funds Rate, mortgage rates should respond.

Of course, the timing of when the Fed takes action could change because of new economic reports, world events, and other factors. That’s why it’s usually not a good idea to try to time the market.

Bottom Line

Recent economic data may signal that hope is on the horizon for mortgage rates. Let’s connect so you have an expert to keep you up to date on the latest trends and what they mean for you.

What Is Going On With Mortgage Rates in Simi Valley, California?

What Is Going on with Mortgage Rates?

You may have heard mortgage rates are going to stay a bit higher for longer than originally expected. And if you’re wondering why, the answer lies in the latest economic data. Here’s a quick overview of what’s happening with mortgage rates and what experts say is ahead.

Economic Factors That Impact Mortgage Rates

When it comes to mortgage rates, things like the job market, the pace of inflation, consumer spending, geopolitical uncertainty, and more all have an impact. Another factor at play is the Federal Reserve (the Fed) and its decisions on monetary policy. And that’s what you may be hearing a lot about right now. Here’s why.

The Fed decided to start raising the Federal Funds Rate to try to slow down the economy (and inflation) in early 2022. That rate impacts how much it costs banks to borrow money from each other. It doesn’t determine mortgage rates, but mortgage rates do respond when this happens. And that’s when mortgage rates started to really climb.

And while there’s been a ton of headway seeing inflation come down since then, it still isn’t back to where the Fed wants it to be (2%). The graph below shows inflation since the spike in early 2022, and where we are now compared to their target rate:

No Caption Received

As the graph shows, we’re much closer to their goal of 2% inflation than we were in 2022 – but we’re not there yet. It’s even inched up a hair over the last 3 months – and that’s having an impact on the Fed’s plans. As Sam Khater, Chief Economist at Freddie Mac, explains:

“Strong incoming economic and inflation data has caused the market to re-evaluate the path of monetary policy, leading to higher mortgage rates.”

Basically, long story short, inflation and its impact on the broader economy are going to be key moving forward. As Greg McBride, Chief Financial Analyst at Bankrate, says:

“It’s the longer-term outlook for economic growth and inflation that have the greatest bearing on the level and direction of mortgage rates. Inflation, inflation, inflation — that’s really the hub on the wheel.”

When Will Mortgage Rates Come Down?

Based on current market data, experts think inflation will be more under control and we still may see the Fed lower the Federal Funds Rate this year. It’ll just be later than originally expected. As Mike Fratantoni, Chief Economist at the Mortgage Bankers Association (MBA), said in response to the Federal Open Market Committee (FOMC) decision yesterday:

“The FOMC did not change the federal funds target at its May meeting, as incoming data regarding the strength of the economy and stubbornly high inflation have resulted in a shift in the timing of a first rate cut. We expect mortgage rates to drop later this year, but not as far or as fast as we previously had predicted.”

In the simplest sense, what this says is that mortgage rates should still come down later this year. But timing can shift as new employment and economic data come in, geopolitical uncertainty remains, and more. This is one of the reasons it’s usually not a good strategy to try to time the market. An article in Bankrate gives buyers this advice:

“ . . . trying to time the market is generally a bad idea. If buying a house is the right move for you now, don’t stress about trends or economic outlooks.”

Bottom Line

If you have questions about what’s happening in the housing market and what that means for you, let’s connect.

Lending Standards Are Not Like They Were Leading Up to the Crash

Lending Standards Are Not Like They Were Leading Up to the Crash

 

You might be worried we’re heading for a housing crash, but there are many reasons why this housing market isn’t like the one we saw in 2008. One of which is how lending standards are different today. Here’s a look at the data to help prove it.

Every month, the Mortgage Bankers Association (MBA) releases the Mortgage Credit Availability Index (MCAI). According to their website:

“The MCAI provides the only standardized quantitative index that is solely focused on mortgage credit. The MCAI is . . . a summary measure which indicates the availability of mortgage credit at a point in time.”

Basically, the index determines how easy it is to get a mortgage. Take a look at the graph below of the MCAI since they started keeping track of this data in 2004. It shows how lending standards have changed over time. It works like this:

  • When lending standards are less strict, it’s easier to get a mortgage, and the index (the green line in the graph) is higher.
  • When lending standards are stricter, it’s harder to get a mortgage, and the line representing the index is lower.

In 2004, the index was around 400. But, by 2006, it had gone up to over 850. Today, the story is quite different. Since the crash, the index went down because lending standards got tighter, so today it’s harder to get a mortgage.

Loose Lending Standards Contributed to the Housing Bubble

One of the main factors that contributed to the housing bubble was that lending standards were a lot less strict back then. Realtor.com explains it like this:

“In the early 2000s, it wasn’t exactly hard to snag a home mortgage. . . . plenty of mortgages were doled out to people who lied about their incomes and employment, and couldn’t actually afford homeownership.”

The tall peak in the graph above indicates that leading up to the housing crisis, it was much easier to get credit, and the requirements for getting a loan were far from strict. Back then, credit was widely available, and the threshold for qualifying for a loan was low.

Lenders were approving loans without always going through a verification process to confirm if the borrower would likely be able to repay the loan. That means creditors were lending to more borrowers who had a higher risk of defaulting on their loans.

Today’s Loans Are Much Tougher To Get than Before

As mentioned, lending standards have changed a lot since then. Bankrate describes the difference:

“Today, lenders impose tough standards on borrowers – and those who are getting a mortgage overwhelmingly have excellent credit.”

If you look back at the graph, you’ll notice after the peak around the time of the housing crash, the line representing the index went down dramatically and has stayed low since. In fact, the line is far below where standards were even in 2004 – and it’s getting lower. Joel Kan, VP and Deputy Chief Economist at MBA, provides the most recent update from May:

“Mortgage credit availability decreased for the third consecutive month . . . With the decline in availability, the MCAI is now at its lowest level since January 2013.”

The decreasing index suggests standards are getting much tougher – which makes it clear we’re far away from the extreme lending practices that contributed to the crash.

Bottom Line

Leading up to the housing crash, lending standards were much more relaxed with little evaluation done to measure a borrower’s potential to repay their loan. Today, standards are tighter, and the risk is reduced for both lenders and borrowers. This goes to show, these are two very different housing markets, and this market isn’t like the last time.