Are Mortgage Rates Falling along with Home Prices?

July 12, 2022

Are Mortgage Rates Falling along with Home Prices?

Mortgage rates are dropping? And home prices are dropping as well?

Let’s take a look at three articles that talk about this. One has a NAR Economist break down six things we need to do right now and need to be aware of. There’s also an article about interest rates during the recession, which was new information for me and a surprise (in a good way). Lastly, we also have an article with data from Black Knight showing where housing is going and how home prices have dropped over the last few months.

The first one is an article by Market Watch titled “I’m the director of forecasting for the National Association of Realtors. Here are 6 things you should know about the housing market now.” I’ve listed the first five, but you can read the whole article.

This was written on July 5th, and according to the article, Nadia Evangelou says, “Mortgage rates are rising, as are home prices. Here’s what buyers and sellers should know now.”

Mortgage rates are not rising. We’ve seen they’ve been dropping over the past week. But here are five of the six things Evangelou mentioned:

  1. The outlook is for mortgage rates to rise even further.

“Mortgage rates for 30-year fixed loans hit roughly 6% in June, up from a little over 3% a year ago, according to Bankrate data. The upward climb will continue, says Evangelou, just not at that same rapid pace,” according to Market Watch.

I have some great information regarding this from the Wall Street Journal. The article is called "Mortgage Rates Fall to 5.3%, Reflecting Recession Fears."

The article says, “Growing fears of a recession in the U.S. stand to further push down mortgage rates as investors pile into U.S. Treasurys, widely seen as safe investments during times of economic uncertainty. Mortgage rates are closely tied to yields on the benchmark 10-year U.S. Treasury, which fell to their lowest level in more than a month this week. Yields fall when prices rise.”

What does that tell us? Think about that process. If we are confirmed to be in a recession, as some people believe we’re already in, we won’t know for at least a couple of days, maybe even weeks. But if we do, does that mean interest rates will fall according to this?

Because now, investors are pulling back from investing in the market due to its instability and are instead investing in Treasury bonds. When that happens, interest rates will most probably go down. That is interesting information.

What this does tell us is that mortgage rates might not go up as predicted.

  1. Some buyers may want to consider an ARM (Adjustable Rate Mortgage)

According to Market Watch, this is what Evangelou says, “If they plan to sell or refinance in the next 5 years, a 5/1-year ARM may make more sense because the rate on these is still below 4.5%.”

I don’t know about that. It is up to you if you want to do that, but I always recommend staying away from ARM. Especially if the mortgage rates fluctuate as often as they do right now.

  1. There are signs that the market is cooling

Yes, of course. We are already in the middle of it. The market has been cooling for a while now. Does that mean things are going to crash? Of course not. Stop it with the crash. It is just cooling and heading towards a neutral market.

Market Watch says, “Both rising mortgage rates and home prices hurt affordability for many buyers. … According to Evangelou, buyers earning $75,000 can afford about 25,000 fewer listings now compared to January.”

Yes, I agree that affordability is an issue for buyers right now.

  1. Institutional buyers may increase competition for first-time buyers

According to the article, “Research has shown that institutional investors may be taking a significant portion of homes that would otherwise be sold to first-time and lower-income buyers.”

We’ve seen that throughout the pandemic. A lot of investors came in, purchasing properties, outbidding first-time homebuyers, and flipping those properties into short-term rentals. And it is still happening a lot. Why? Because it is incredibly profitable.

I have some friends who do this, and I see them make tons of money from it.

  1. Home prices will continue to rise, but at a slower pace

“Due to a housing shortage, home prices won’t drop in 2022,” Market Watch quotes Evangelou.

This is the part we can’t say for sure. There is no crash coming, but it doesn’t necessarily mean that home prices are going to continue to go up. Right now, they are still rising, for the most part, even though we are seeing price reductions. However, the sale price data shows it is still going up. Will that continue? I don’t know. Different areas are getting hit differently, like how Miami and Boise are very different in comparison to places like Los Angeles and Ventura County. Right now, it is too early to tell, so keep an eye on it.

In fact, according to Forbes magazine, “Mortgage Rates Drop as the Housing Market Begins to Cool.” This one was written on July 7th, and their take is the opposite of the Market Watch article, where the economist is saying mortgage rates are going to continue to go up slightly with home prices.

Home price growth is also beginning to decelerate, with the largest one-month drop in 16 years. According to the latest report by Black Knight, a data analytics firm, the annual home price growth rate of 19.3% in May compared to 20.4% in April was the biggest single-month decline since 2006.

Price drops occurred in 97 of the largest 100 metro areas, signaling a nationwide market cooling. But even with these recent retreats, home prices would have to continue slowing at this rate for at least the next 12 months to return the housing market to a more normalized 3% to 5% growth rate, according to Ben Graboske, president of Black Knight Data & Analytics.

(Source: Forbes)

Graboske tells us that the deceleration pace might continue in the next few months as what is happening now in Austin, Boise, and Phoenix. And yet, it will take 12 months of this “massive” slowdown before the housing market even gets back to equilibrium. That is according to Black Knight’s data analysis—there is no crash in the foreseeable near future.

We just saw mortgage rates drop over 0.5% in the span of a week and a half, even after the Fed raised the rates to 0.75. Even with a lot of people predicting that mortgage rates are going to continue to rise, the opposite just happened.

In Conclusion…

Pay attention to all the details because all of these things matter.

Are we heading into a recession? And if we do—remember that in most recessions, real estate does very well—what happens? Investors rely less on the market and buy Treasury bonds, which makes mortgages drop and makes housing more affordable.

There’s too much happening that might be different from what we expected or thought would happen. Forecasts for 2023 are just forecasts. They are not things that will definitely happen, but just possibilities.

What we do know right now is that there is no crash, based on the data we see and that there is a deceleration happening in the housing market. Some areas will see a decrease in home prices, so pay attention to where those areas are.

Don’t be misinformed. If you need to buy a house, go ahead and buy it. If you don’t, or you aren’t ready to buy one right now, don’t. But if you are holding off on buying a house, or you are freaking out and selling your properties because of fear of a crash, stop. There is no crash coming.