Mortgage Rate Trends

Higher mortgage rates in the UK are eventually going to hurt.   Markets have now moved to price in a 6.5% peak in UK interest rates by February 2024 and for rates to stay above 6% until the end of 2024.   Given the recent shift higher in swap pricing, which affects the fixed mortgage rates banks can offer, new 2 year fixed mortgage rates could soon be close to 6.5%, even for borrowers with significant equity in their property.    Two years ago borrowers with a 25% or more deposit could fix their mortgage for 2 years at about 1.5%.   Anyone with a fixed rate deal that is soon coming to an end and has to refinance soon, will see their mortgage payments rise significantly. This should put downward pressure on discretionary spending as more and more cheap fixed mortgage rates expire.   Another 2.4 million fixed rate mortgage deals are set to expire between now and the end of 2024.   As the chart below shows, if a household has to refinance from a mortgage rate of 1.5% to 6.5%, their mortgage payments would rise by over 80% (assuming they maintain the term of the loan at 30 years on a repayment mortgage).   They might choose to extend the term of the mortgage to reduce the monthly payments (but substantially increase the total interest paid over the term of the loan).   But increasing from a 30 year term to 35 years would mean the increase in payments would be still be 75%. Increasing to a 40 year term (if allowed) would mean the payments would still rise by 70%.   So eventually, the level of interest rates currently being priced into UK bond markets is likely to be painful for the economy and could lead to rate cuts.   But until enough fixed rate mortgage deals have expired to slow the economy and cool inflation, interest rates could continue to move higher.   Where do you think UK interest rates will peak? And how long until they have to be cut? #interestrates #mortgages #economy #inflation

The recent decline in mortgage rates—staying below 6.5% for most of September—is a meaningful shift for housing. Though it may not feel like much for those accustomed to 2% or 3% rates, even small drops can have a major impact on affordability.   For example, moving from 7% to 6.5% puts 2.125 million more households in a position to buy. If rates were to fall to 6%, that number more than doubles, pricing in another 4.246 million households.   That said, it's important to consider the underlying reason behind the decline: the cooling labor market. Our historical research shows a consistent two-phase dynamic between the economy and housing:   Phase 1. A slower job market initially reduces housing demand despite lower rates. This is driven by job insecurity and weaker consumer confidence. Phase 2. Falling interest rates eventually outweigh those headwinds, helping revive sales activity.   Right now, the housing market is still in Phase 1. This is consistent with the historical pattern where housing acts as a leading indicator—it slows before the broader economy but also turns the corner sooner. Zonda Alexander Edelman Trevor Tetzlaff Sean Fergus Sarah Bonnarens Tim Sullivan Keith Hughes Cameron McIntosh Kyle Cheslock

July’s employment report from the Bureau of Labor Statistics should give the Fed the exclamation point they have been looking for to show that the economy is slowing enough to warrant a rate cut. Market expectations have shifted firmly to a 50-bps interest rate cut at the Fed’s meeting in mid-September, rather than a 25-bps cut which had been the prevailing view prior to this report. Now handwringing will ratchet higher as to whether the Fed is in the process of successfully orchestrating a soft landing or if they have waited too long to shift their monetary policy stance. Job growth slowed more than expected in July and gains in May and June were revised lower. The unemployment rate increased 20 bps during the month and is up 60 bps over the past six months – unemployment rate changes of 50 bps or more over a six-month period have typically corresponded with recessions (see accompanying chart). Wage growth also appears to have slowed over the past couple of months. Even allowing for some volatility in the monthly data, the three-month moving average in employment growth and unemployment show an undeniable softening. Unemployment insurance claims add further evidence to the slowing trend. Initial unemployment claims have ticked higher over the past three weeks and continuing claims are at their highest level since the fourth quarter of 2021. It is difficult to call current labor market conditions weak with the unemployment rate still at 4.3%, but job gains appear increasingly lackluster across major employment sectors and the loss of momentum is undeniable. Stock and bond market participants are reacting in a way that suggests increased recession fears. Earnings reports have only fueled these concerns. The 10-year Treasury rate has fallen materially below 4.0%. Mortgage rates have also been ticking lower, which is good news for prospective home buyers. Rate cuts appear to be on the way, but macroeconomic conditions are increasingly precarious and the Fed’s September meeting may start to feel like a lifetime away if more bad news unfolds. The week ahead is not a busy one from an economic news perspective, but ISM services, mortgage delinquency, Fed Senior Loan Office Survey, and jobless claims, among others will be interesting to watch for additional information on the economy’s trajectory. What indicators are you watching for?

Pending Home Sales Deliver a Major Upside Surprise The National Association of REALTORS® released its Pending Home Sales Report this morning, offering one of the most forward-looking reads on U.S. housing demand. Unlike existing-home sales, which reflect transactions already completed, pending home sales track homes under contract and capture buyer intent earlier in the decision process. Pending home sales jumped 3.3% month over month in November, far exceeding expectations, and rose 2.6% from a year earlier. Gains were broad-based across all four regions, with the Pending Home Sales Index climbing to 79.2 from 76.7, its strongest level in nearly three years after seasonal adjustment. The timing matters. This surge follows last week’s existing-home sales report, which also showed a modest increase. Taken together, the two releases suggest November’s improvement was not simply the clearing of older transactions delayed by earlier rate volatility. Activity appears to be strengthening at multiple points in the housing funnel, from contract signings to closings, pointing to renewed buyer follow-through rather than residual momentum. That distinction carries broader economic implications. Housing is among the most interest-sensitive sectors and often serves as an early signal of shifts in household behavior. Rising pending sales indicate consumers are becoming more willing to make large, long-term financial commitments even as mortgage rates remain elevated by historical standards. Rather than waiting for perfect conditions, buyers appear to be recalibrating expectations and moving forward as conditions stabilize. Improving housing intent tends to ripple outward. Increased contract activity supports demand for mortgage lending, insurance, real estate services, and, over time, spending on home improvement, furnishings, and local services. While this report does not signal a return to excess, it suggests the drag housing has placed on economic growth may be easing. Mortgage rates have eased modestly, wage growth continues to outpace home price gains, and inventory is more available than a year ago. That combination appears sufficient to unlock sidelined demand without reigniting unsustainable acceleration. The picture that emerges is one of adjustment rather than exuberance. Havas Edge tracks pending home sales closely because they reveal shifts in consumer intent and economic behavior before those changes appear in completed transactions, credit data, or broader consumption trends.

This crucial macro indicator shows the clock is ticking for many economies: tick tock, tick tock. As we know, the US economy is quite shielded from higher interest rates: 1) Contained levels of private sector leverage 2) Only gradual refinancing cliffs 3) 30-year fixed mortgages and long-dated corporate borrowing locked in It might still take long, but tracking the extent of the passthrough of Fed hikes to the economy is key to understand when this macro cycle is about to turn sour. And the good news is that you don’t need a complex model to estimate refinancing cliffs, mortgage resets and all that. Instead, for a quick and effective glance you can rely on a publicly available metric: Debt Service Ratios (DSR). Debt service ratios are a proxy for the share of available income or earnings that households and corporates must direct towards debt servicing costs. The more of your income you must direct towards debt servicing costs, the less you have for consumption and spending. And as a result, the economy slows down. The higher the private sector leverage, the higher the share of floating rate loans and mortgages, and the higher the share of refinancing or rates resets the more likely DSRs will shoot higher during a hiking cycle: that’s evidence that Central Banks’ rate hikes are getting transferred to the real economy. Instead, an economy with contained private sector leverage revolving around 30-year fixed mortgages is going to experience a very limited DSR increase even in the face of hikes. But it's the rate of change which matters the most: rapid increases in the Debt Service Ratio are a big red flag. Take a look at the table below: can you spot who is in trouble? Something might break sooner rather than later, but it's probably not where you think it will. Follow me (Alfonso Peccatiello) for more macro analysis like this.

Never so Strong/Never so Weak These two conditions are both true. First, the housing market is strong with prices at a record high. While this “high price” condition is true, owning a home has never been so unattainable. The U. of Michigan Survey reports that “Buying Conditions for Homes” is the weakest on record, since the late-1970’s (graph below). Last week, it was reported that Housing Starts declined 5.5% seasonally adjusted to an annualized rate to 1.28M, which equates to a decline of 19.3% year-over-year. The mortgage purchase applications reported by Mortgage Bankers Associate report consistent data as the application rated has declined 11.8% y-o-y, and even more when including refinancings. Bottom line: ZIRP enabled homeowners to attain ultra-low mortgages, thus creating a lock-in effect, that lowers supply, pushes prices higher which reduces the percentage of home buyers that can afford the higher priced homes financed at higher mortgage rates. Home insurance, RE taxes, maintenance has risen in line with inflation costing the homeowner 20% more than pre-COVID which is in addition to the cost of the home and the cost of financing. Affordability has become a greater factor influencing housing market dynamics as it lower ‘D’ sufficiently in the Supply-Demand equation. The good news is that help is on the way. Later this year, the Fed will begin to lower rates, however, they will lower the Fed Funds rate and a 30-year mortgage is priced off the 10-year treasury, so although the front end will come down, what happens to intermediate UST rates is the key to the equation. When looking at U of Michigan Survey, I take comfort knowing this is likely what a trough looks like. It is a healthy condition too that household net worth relative to income is near record high levels. If mortgage rates decline, hosing activity will pick up due to affordability, and while more homes will come on to the market for sale, prices, I do not expect this increased supply to drive home prices lower since there is still a 3M shortage of homes. Home builders will build/deliver, however, they will be disciplined not to over-supply the market and maintain profit margins despite higher cost for land, labor, and materials. Multi-family rentals have also surged and continue to be firm given how more affordable it is to rent than to buy. Data released today from Zillow show nationwide rents have advanced 30.4% since COVID, above the 20.2% rise in incomes over this period. Last week, the Federal Reserve Bank of Kansas City released their economic bulletin on Housing that discusses housing inflation and its impact; this graph from the KC Fed (below) focusses on lack of mobility for a large cohort of homeowners that would face significantly higher housing costs if they were to move, with the knock on effect that this dynamic creates less available supply of housing stock, and as a result higher prices given demand for housing.

After the FOMC press conference, a September rate cut seems more likely. Markets are betting on three rate cuts by the end of the year. What does a possible rate cut (or two) mean for the housing market? The expectation of a Fed rate cut is already exerting downward pressure on mortgage rates. The 10-year yield (benchmark for 30-YR FRM) is now the lowest since March 2024. Should incoming data on labor and inflation continue to support a more dovish Fed, we could see further, albeit gradual, declines in mortgage rates. As such, we expect a very modest easing in the affordability constraints holding back potential first-time buyers, as well as a little easing in the magnitude of the rate lock-in effect for existing homeowners. However, a decline in mortgage rates may boost demand more than supply. Traditionally, existing home inventory has made up the bulk of total inventory, and approximately 86 percent of existing homeowners have a rate below 6 percent. So, even if mortgages rates fall gradually through the remainder of this year, they are unlikely to fall enough to ‘unlock’ the majority of homeowners.

How are Middle East tensions impacting the housing market? Our latest Zoopla HPI is out today and has the latest on current trends The sales market is still moving — but the balance between sales and demand is shifting. Recent tensions in the Middle East have pushed mortgage rates higher and raised fears for inflation and the cost of living. This is starting to feed through into buyer behaviour. Demand is down on last year but sales agreed are holding up as serious movers support sales. Buyer demand has been running below last years levels over Q1 - events in the Middle east saw the gap widen over March and buyer demand is running 13% below last year (as at 22 March) However, talk of a possible deal last week has seen the gap narrow over the last week as buyers digest the news and more are returning to the market. Buyer demand is more volatile than sales agreed which are down just 2%. Record numbers of homes for sale mean many serious movers in the market who can only hold off on plans for so long where it cam take many months to find a home and complete a sale. What we see is fewer people are entering the market, but those who remain are more committed - often with mortgage offers agreed or a clear need to move. These “serious movers” are keeping transactions flowing, even as some early-stage buyers adopt a ‘wait and see’ approach. For buyers, this means: - Less competition - More choice - But tighter affordability if no mortgage rate locked in For sellers: - Homes are still selling - But pricing and presentation matter more House price growth remains stable for now (+1.3% annually), but the outlook depends on what happens next with mortgage rates and buyer confidence. The takeaway: Sales activity isn’t slowing - it’s becoming more selective, and increasingly reliant on a smaller pool of committed buyers. #housing #estateagents #newhomes #mortgage #property

Per a recent analysis by Redfin, 92% of all mortgages are below 6%. 82% of mortgages are below 5%; 62% are below 4% and a lucky 23.5% are below 3% (nice job guys). See the graph. The current 30-fxed mortgage rate is now 7.58%. And the 10-year UST just hit a 15-year high of 4.21% yesterday - front page WSJ news today. The last time 10y UST was that high was back in June 2008. Those were interesting days... Dana Anderson, writing for Redfin said: "Many would-be sellers are staying put rather than listing their home to avoid taking on a much higher mortgage rate when they purchase their next house. This “lock in” effect has pushed inventory down to record lows this spring." As I've said previously, this dynamic is showing us that Fed policy appears to be affecting Supply more than Demand, despite the Chairman's comments to the contrary. Powell has been quoted saying the Fed could only impact Demand with their policy. Based on what is happening in the mortgage market, I think we can conclusively say that is not the case. High rates are affecting supply in a major way. Given that home values haven't dropped much since 2022, we can conclude that the supply curve has shifted nearly as much as the demand curve. What are you seeing out there? What I see, anecdotally, is that when a house goes up for sale, buyers pounce because there are so few houses for sale, while there are still buyers who relocate for jobs, etc. It's pushing up the bids where I live. #fedpolicy #interestrates #riskmanagement

Fresh data on consumer price index shows that the inflation rate is not contained but moving ever so slightly into a better spot. The conquering of inflation will be a key factor in bringing down the mortgage rates, which so far have refused to budge even as the Federal Reserve has been cutting other interest rates. The overall consumer price rose by 2.9% to close out 2024. It is expected to go down further because the heavyweight components of shelter costs are decelerating, as rents and home prices are no longer rising as strongly. The latest 4.5% rise in shelter costs appears high but marks the slowest gain in three years. Various non-official private sector data are pointing towards no growth in apartment rent due to the vast oversupply of new empty units hitting the market. Moreover, with oil prices falling by about 30% from three years ago, more calming effects on inflation are embedded in the future inflation data. Mortgage rates will move slightly lower – perhaps to 6.5% just in time for the spring home-buying season.