Why the housing market should brace for double-digit mortgage rates in 2023

Even if Federal Reserve Chair Jerome Powell and his colleagues soon stopped raising interest rates, the interest rate on 30-year fixed-rate mortgages would still rise to 10%, according to Christopher Whalen, chairman of Whalen Global Advisors.

That’s because the rapid pace of Fed rate hikes in 2022 will take time to feed back into mortgage rates, especially as Fed funds rates have already risen to a range of 3% to 3.25% in late September , from almost zero a year earlier.

“Lenders have been slow to adjust interest rates,” Whalen told MarketWatch. “They’re not used to interest rates moving so quickly and would typically only change interest rates once a month or once every two months.”

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Borrowers pay a premium above Treasury risk-free rates on mortgages to offset the risk of default. The 30-year Treasury rate TMUBMUSD30Y,
rose to 4.213% on Thursday, the highest since 2011, according to Dow Jones Market Data.

Freddie Mac said Thursday that the 30-year mortgage rate averaged 6.94% in its latest weekly survey, a 20-year high that has severely curtailed demand for new home loans.

However, with US inflation showing no signs of a significant retreat from a 40-year high, expectations are high that the Fed will hike interest rates by another 75 basis points at its November meeting, and potentially by the same amount again in December, according to the CME FedWatch tool.

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CME rates on Thursday favored a 4.75%-5% fed funds rate to open February.

“There’s a lag effect on mortgages,” Whalen said, adding that even if central bankers decided after their December meeting to pause on further rate hikes, the 30-year mortgage rate would still “easily hit 10% by February.” “.

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Whalen, an investment banker, author and specialist specializing in banking and mortgage finance, asked the US Securities and Exchange Commission in 2008 to “bring back to light” complex and opaque derivatives after banks and investors suffered hundreds of billions of dollars in losses had to be tied to structured debt, including subprime mortgage exposures. He also testified before Congress in 2009 about systemic risks in the banking industry.

Now, Whalen sees another major shock in the mortgage banking market ahead as profitability continues to fall (see chart) and the housing market falters.

Mortgage bank profits are in the red even as interest rates continue to rise

Whalen Global Advisors

Importantly, Whalen also sees the potential for real estate prices to give back all of their pandemic gains if interest rates remain high throughout 2023.

That’s a bigger call than estimates for a 10% to 15% correction in home prices from prices that have risen 45% nationwide during the pandemic.

But Whalen pointed to speculative home exchange volumes hitting nearly $150 billion, or 10% of total home sales in 2022, and the cold ceiling of double-digit mortgage rates as catalysts for a deeper fall in home prices.

Economists at Mizuho Securities said average home selling prices were down 2.5% from their peak in a note to clients on Thursday, calling the housing market “deteriorating” but mostly in line with expectations given the sharp rise in mortgage rates.

Mortgage loan interest rates can be directly traced back to the MBS (Mortgage Backed Securities) market, which are bonds traded on Wall Street, mostly with government backing, that make up most of the nearly $13 trillion U.S. finance the mortgage debt market.

The Fed’s race to raise interest rates has shaken financial markets, sending stocks lower and causing mortgage bond issuance to fall sharply this year, while making it more expensive for businesses, local governments and households to borrow as part of its inflation-fighting effort.

“It’s going to be months before we get the bond market and the credit market in sync for people to start making money again,” Whalen said.

Shares closed Thursday lower for a second straight day, exiting the S&P 500 index SPX.
23% discount on the year at 3,665.78 and the 10-year Treasury rate TMUBMUSD10Y,
at 4.225%, its highest level since June 2018.


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