News from recent Silicon Valley Bank and Signature Bank collapses raised fears that a series of similar failures could occur. But there could be a silver lining for potential buyers, as the upheaval caused by the implosion of the banks could lead to a change in mortgage rate tendencies.
The bank failures have “introduced a whole new level of uncertainty into the economy,” said Lisa Sturtevant, chief economist at real estate firm Bright MLS, in an emailed statement.
This uncertainty could affect mortgage rates in two ways.
Mortgage rates could drop, Fed says
On the one hand, perceived weakness in the financial sectors could the Federal Reserve to change its monetary policy with regard to inflation.
For months, the US central banking system has struggled to bring inflation down from a peak of 9.1% last June to a long-term target range of 2% (it is currently at 6%). To achieve this goal, the Fed implemented a series of increases in the federal funds rate, essentially raising it from 0% beginning of March 2022 at 4.5%-4.75% now.
The federal funds rate is the rate banks charge each other to borrow money overnight and does not directly impact mortgage rates. However, the increases increase the cost of borrowing on all types of credit, including home loans – which is why mortgage rates more than doubled last year.
Until last week, experts expected the Fed to approve a further 0.50% rate hike at its meeting next week. But now, given the collapse of SVB and Signature Bank, market analysts increasingly feel the Fed will change course. It could choose to suspend rate hikes altogether or implement a smaller rate hike of 0.25%.
“If the Fed backtracks on planned rate hikes, it will be a signal that it sees weakness in the financial sector and in the broader economy,” Sturtevant said. And if the Fed halts or slows the pace of short-term rate hikes, mortgage rates should stabilize or even autumn.
Rates could move with Treasury yields
This perceived financial weakness could also lead to the second way mortgage rates could be affected. In period of economic uncertainty, investors tend to avoid riskier investments like stocks and seek the relative safety of Treasuries. The 10-year Treasury yield in particular will influence the evolution of mortgage rates.
Changes in 10-year Treasury yields do not directly affect mortgage rates, but there is a correlation between the two: when yields rise, mortgage rates tend to rise. When yields fall, so do rates. Typically, mortgage rates tend to be 1.8 to 2 percentage points above the 10-year yield.
There has already been an effect on daily mortgage rates following last week’s bank meltdowns. 10-year Treasury yields rose from nearly 4% last Wednesday to just over 3.5% on Monday before rebounding slightly on Tuesday. Mortgage rates also fell at the end of last week.
The full effect, if any, of this rate cut will be felt when Freddie Mac releases its benchmark rate data on Thursday.
Lower mortgage rates could help buyers
Lower mortgage rates may make it easier for potential buyers to navigate next spring purchase season.
Homebuyers have been very rate sensitive so far this year. In January, the rate on a 30-year fixed-rate mortgage fell nearly a full percentage point, triggering an uptick in buyer activity hailed by a housing market which had been almost dormant for the last half of 2022.
However, the downward trend in rates reversed in February, with rates approaching 7% as recently as in the early last week. Now, if rates fall, experts believe buyers will become active in the market again.
“Lower mortgage rates could unfreeze what was shaping up to be a pretty frozen spring home shopping season,” Skylar Olsen, chief economist at Zillow, said Tuesday. statement. “A sustained rate cut will be a welcome boost to affordability.”
Olsen added that there are still pitfalls for some buyers. If the problems in the banking sector extend beyond SVB and Signature Bank and end up being indicative of broader economic problems, the risks of a deeper and longer-lasting recession than expected increase. Technology-intensive and other housing markets affected by layoffs will likely experience a slowdown, regardless of the direction mortgage rates take.
This could lead to another decline in buyers unable to afford a home purchase, as well as a likely decline in home values.
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