According to Christopher Whalen, head of Whalen Global Advisors, even if Federal Reserve Chairman Jerome Powell and his colleagues stopped rising policy rates soon, the 30-year fixed mortgage rate still would increase to 10%.
This is due to the fact that the Fed's rapid rate hikes in 2022 take time to filter back into mortgage rates, despite the fact that the fed-funds rate jumped to a range of 3%-3.25% in late September, up from practically zero a year before.
According to an interview with MarketWatch, Whalen said, "Lenders only slowly adjust their rates." "Rates are changed once a month or once every other month, so they are not used to witnessing such rapid swings."
Mortgage rates often carry a premium above risk-free Treasury rates to compensate for borrowers' exposure to default. According to Dow Jones Market Data, the 30-year Treasury rate hit 4.213% on Thursday, its highest level since 2011.
Thursday, Freddie Mac reported that the average rate for a 30-year mortgage was 6.94% in its most recent weekly poll, marking a 20-year high that has dramatically reduced demand for new home loans.
CME FedWatch predicts that the Federal Reserve will raise its policy rate by 75 basis points at its meeting in November, and perhaps by the same amount again in December, as U.S. inflation shows no evidence of clearly pulling back from a 40-year peak.
Thursday's CME odds supported a beginning February fed-funds rate of 4.75 percent to 5 percent.
Even if policymakers opt to halt any rate hikes at their December meeting, Whalen predicts the 30-year mortgage rate would "easily touch 10% by February" due to the "lag effect" in mortgages.
After financial institutions and investors lost hundreds of billions of dollars due to structured debt, including subprime mortgage exposure, investment banker, author, and specialist Whalen urged the U.S. Securities and Exchange Commission in 2008 to bring complex and opaque derivatives "back into the daylight." In 2009, he testified before Congress on the systemic dangers facing the financial sector.
As the housing market slows and profits continue to be squeezed (chart), Whalen predicts another significant shakeout in the mortgage banking industry.
Additionally, if interest rates remain elevated for the whole year of 2023, Whalen predicts that property values may lose all of their post-pandemic gains.
That's a bolder prediction than economists' predictions of a 10%-15% drop in property values after their 45% nationwide increase during the epidemic.
Yet Whalen cited the double-digit increase in mortgage rates and the over $150 billion in speculative house flipping volume (10% of all home sales in 2022) as causes for the sharper home price decline.
Economists at Mizuho Securities estimated a 2.5% drop in median house sales prices from their high on Thursday in a client note, calling the housing market "deteriorating" but generally in line with predictions given the significant increase in mortgage rates.
The MBS market on Wall Street is the primary source of funding for the almost $13 trillion U.S. mortgage debt market, and hence a major factor in determining mortgage interest rates.
The Federal Reserve's haste to increase rates has rocked financial markets, buried equities, and resulted in a sharp decrease in mortgage bond issuance this year, all while making it more expensive for businesses, governments, and consumers to take on debt in an effort to combat inflation.
Whalen predicted that it would take months to restore profitability to the bond and loan markets.
What does this mean for NON-QM and Private Lending?
Private lenders typically charge an extra 1-2 points on the rate, resulting in interest rates of up to 12% for a 30-year loan. One approach to deal with the exorbitant interest rates is to take out shorter-term loans, such as a Bridge Loan. This gives you time to assess how your investment will perform in the present market conditions, avoiding the need to commit to a loan for the next 3-5 years.
If you are in need of financing for your next investment feel free to submit a hassle-free quote and one of our qualified loan officers will assist you every step of the way.
