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I predicted on April 6th, 2022 that rates would get to 7.625%. We got there today. What's next?

Eric Simantel

Making Mortgages Less Expensive. Licensed in OR, WA, and CA and now Idaho.

发布日期: 2023年10月3日

On April 6th, 2022 – back when mortgage rates were averaging 4.72% (as reported by Freddie Mac), I said mortgage rates would reach as high as 7.625% on or around May 2023.? I called a shot that was more than a year away. I also said that despite rising rates, we’d see a stable housing market.? In looking back at other forecasts, from what I could find, I was the earliest (by far) to make a call as bold and as high as that.

I was called crazy by many folks in my industry.? In fact, other top tier well-respected forecasters were predicting rates to decline (sourced below):?

In January 2023, CNBC reported that Bankrate.com forecasted rates to fall to 5.25% by the end of the year.
On July 16th, 2023 USA Today reported Mortgage Bankers Association (MBA) forecasted that mortgage rates for 30-year fixed-rate mortgages will head downward in 2023 and end the year at about 5.2%.
As of July 27th, 2023 The National Association of Realtors (NAR) forecasted that the 30-year fixed-rate mortgage could reach 6.4% by the end of the year.
The "infamous May 10th prediction" by many in our industry was based on that respective date’s Consumer Price Index report. Many said that from that date forward, the report would push rates on a ‘steady decline downward’.

Well, here we are – with rates north of 7.625%.? I was right about the rate, but off by a few months on when we would get there. According to MBS Highway, today’s average rate for a premium homebuyer buying a primary home – we are seeing rates on average at 7.72% - exactly 3% higher than they were on the date of my forecast back in 2022.

NOTE: I wasn’t Nostradamus then, I'm still not now. I don't throw darts or make magical potions. I base my forecasts off historical data.? Last year, I looked at March 1980 through October 9th of 1981 as being the window of time as the most similar to what our country was going through and applied it to the respective months moving forward.

Even though Federal Reserve Chairman Jerome Powell states that he believes in a soft-landing, the data is (in my opinion) pointing in another direction. The last time our country saw the Federal Funds Rate rise this fast? Spring of 1980 through early 1981.? July of 1981 started a recession that lasted 18 months until November of 1982.

According to FederalReserveHistory.com , what caused that recession was “tight monetary policy in an effort to fight mounting inflation". Sound familiar?

If I simply stick to the “past behavior is the best predictor of future behavior” forecast modeling – I think our country will be in a recession starting in June of 2024.

Here is some of the water that is starting to pool behind the dam:

1)????? Alignable.com reports that 40% of small business owners weren’t able to pay their rent on time or in full last month.? That number rises to 47% when you look at small retailers.

2)????? As of the end of Q2 2023, US Consumer Credit Card debt has risen to $1,030,000,000,000.? According to Forbes.com as of the week of 10-2-2023, the average credit card interest rate is 28.06%.? That is up from 22.16% in March of 2023.? That means that $24,084,833,333 in JUST interest has to be paid on this debt each month.? To put that in perspective, if each dollar of interest represented a penny to be stacked on each other, that is enough annual interest to reach the moon! A more tangible way to think through it, is that there are 260,836,730 adults in the US – that means on average each adult is paying over $1,100 in just credit card interest each year.?

3)????? Average 1- Year Certificate of Deposit Interest rates have risen from 0.36% in March of 2022 to 1.72% as of the date of this article.? The last time we saw CD rates rise this fast was just prior to the 2008-09 recession.? Why is a rising rate on a CD a marker of a recession?? It shows that banks and credit unions are running out of money to loan out.? You see a bank has to have a certain amount of money on hand at all times that is calculated off the outstanding loans that they have owed back to them.? The way they attract money INTO the bank (and to tie it up for a specific amount of time) is to offer higher interest rates.? If you had for example $100,000 lying around, and wanted a extremely low risk investment, you’d probably put it in a CD.? You’d compare Bank A vs. Bank B, and deposit it for a year in the bank that gave you the higher interest rate. Banks need your money to stay in business.

If we go into a Recession, what does that mean for Mortgage Rates?

In 7 of the last 8 recessions, mortgage rates rose pre-recession, and then fell once firmly inside of the recession.? As I stated earlier, we aren’t in a recession yet – so its very likely for the next 6-8 months we’ll see rates stay where they are, or the more likely scenario is that we’ll see them get even higher (my opinion is counter to what other forecasters are stating once again).? Simply following the 1980-81 models and applying it here, it won’t be until at least June of 2024 that we see rates start to decline.

If we go into a Recession, what does that mean for Home Prices?

Remember, there is a difference between economic recessions and full-blown depressions.? I haven’t seen a forecast for an all-out Depression by anyone.? Home Prices are surprisingly resilient in recessions.? In 1980-1981, the average principal and interest payment on a home in the US rose 44% (sound familiar?).? Despite that rise in payment, according to HUD’s data, home prices rose 6.02% during that same period.

If you are thinking back to 2008-09, and expecting the housing market jolt in pricing like that time period; remember that that recession was a result of shady lending practices, unregulated banking, and folks having no equity in their homes- that's a far different scenario than today.?

Heading into 2024, I’ve seen data suggest as big of a drop of 5% in housing prices - and also as high of a 5% increase of price heading into next year.? Supply remains limited because the middle upper-class aren't moving or downsizing due to higher interest rates. That will continue to limit supply for those looking (or needing) to upgrade their homes, which then limits supply further down the chain to first time homeowners.? If there is anything the housing market learned this year – its that if supply is lower than demand – regardless of economic conditions, prices remain stable.

Vactation Homes will see a decline in price. Anecdotally, in talking to "VRBOers", you are seeing more and more vacancies in marquee west coast cities. If a vacation home that is operating as a business can't make money, you'll start seeing an over-supply of homes in vacation markets come for sale - causing drops in price.

El fin! :-) Thanks for reading, and remember the forecasts in this article are my own, and don't reflect that of C2 Financial Group. When investing, always speak to a Financial Advisor. There are 26 super computers that predict the weather. Just imagine how many there are out there for financial forecasting! And even then we don't always get it right!