What the heck is going on?
It’s been a little while since we checked in with everyone. Navigating todays market is a full time job and…our crystal ball seems to have a crack in it!
We thought it would be interesting to look at interest rates over the past 3 decades. The chart below shows the average 30-year fixed interest rate year by year since 1990.
The record-low rates seen in 2020 and 2021 were largely due to the Coronavirus pandemic. And forces that pushed rates down are no longer present.
When the economy crashed early on during Covid, the Federal Reserve forced interest rates down to keep money circulating.
In addition, investors tend to purchase mortgage-backed securities (MBS) during tough economic times because they are relatively safe investments. MBS prices control mortgage rates, and the flood of capital into MBS during the pandemic helped keep rates at historically low levels.
Those low rates were never meant to be permanent. In fact, the Fed is now taking a more active stance against inflation working to push the overall interest rate market higher.
The U.S. economy was in a strong growth period coming out of the pandemic. Inflation is also at a 40-year high.
As a result, the Fed announced aggressive plans to start fighting inflation. Unfortunately, these plans are not good for mortgage rates.
In short, all signs point toward higher interest rates in 2022. We saw a significant increase in rates during Q1 2022. We also saw a drop in GDP during the same period. The U.S. economy shrank 1.4% in Q1 2022. This is in stark contrast to the economy’s better than expected growth of 7% in Q4 2021, the fastest rate in nearly 40 years.
Typically, a decrease of GDP for 2 quarters is an indicator of recession. Did the U.S. Government do too much, too soon?
We could be looking at a recession, perhaps moderate as soon as this summer and it doesn’t appear that the Fed is bringing inflation under control. A summer recession will force consumers to drastically cut back on spending.
Home prices have increased dramatically as more people made their home their “safe-haven”. Many are priced out of the housing market as homes sold with multiple offers and at inflated prices due to record low housing inventory. It takes approximately 4-6 months of housing supply to create a more equal housing market and currently inventory of homes on the market is at 1.7-month supply.
Rising interest rates have priced people out of the already competitive housing market. For every 1% increase in interest rates, buying power decreases by about 10%. And home interest rates aren’t the only interest rates increasing. Credit card interest rates, installment loan interest rates (ie: auto loans and personal lines of credit), student loans, etc.
Also, the stock market hasn’t exactly been doing well. For April, the S&P fell 8.8% and is down more than 13% for the year. The economy is about to take a hit and everywhere they look, they see trouble ahead.
While this sounds bleak, let’s put this in perspective.
Rates between 1990 and 2009 were generally higher than they are today. The 2008 meltdown which was significantly worse than what we are experiencing now brought rates down into the mid 4% range, and while they dropped a tad during the last decade, rates remained there until the Coronavirus pandemic.
Rates are in the low to mid 5% range right now, and now may be a good time to refinance and take cash out of your home to payoff higher interest debt. Why now? Because home prices are at all-time highs, and you can use your equity to drastically lower your monthly cash outlay. Also, there are many alternative loan programs that make it easier to qualify for a loan right now. Many of these programs will begin to fade away as credit tightens.
If you’re in the market to buy, keep looking and have faith. More houses typically come on the market in the late spring and summer months. Get prequalified and keep your paperwork up to date to make yourself as attractive to a seller as possible.
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