Market Update: Glimmers of Hope Exist as Rates Climb Higher, but How High Will They Go?

Blog posted On October 23, 2023

We’ll start with the bad news: rates continued to climb last week and reached the highest levels in 23 years. It didn’t take much for them to get there since they were already flirting with the line. Nonetheless, it leaves many wondering how much higher rates will climb. We’ll get to that, but we’ll also talk about the silver linings and good news.

Highest rates in 23 years: “unremarkable”

Don’t let the headlines scare you. Yes, rates are the highest they’ve been in a while, but it didn’t take much of a jump for them to get there. “While unfortunate, this [rate jump] is also rather unremarkable,” noted Matthew Graham of Mortgage News Daily. “This is a rising rate environment. Bonds/rates are increasingly capitulating to the notion of "higher for longer." It makes for a typical market pattern where the swings between highs and lows are smaller but more frequent.  In that sense, today was just another day on the same old path.”

How much higher will rates climb?

Rates are trending around 8%. That’s a noticeable difference from the 2% to 3% rates we saw a few years ago. The question remains: when (and where) will rates stop climbing? 9%? 10%? Though it’s too soon to definitively say, “rates will climb no higher than __%,” there is some hope that it won’t be too much higher. Recently, Fed Chairman Jerome Powell hinted that soaring bond yields could lead the Fed rates to stop hiking rates. “If the Fed is correct in their assessment that no further rate hikes are needed to facilitate monetary policy, it would take increasingly surprising data/events to push rates higher at the prevailing pace,” wrote Graham. “This isn't to say rates can't or won't go higher. Rather, the goal is to say that if the economy begins to soften as the Fed expects and if inflation remains roughly in line with the last few months, upward rate momentum should be dying down, all other things being equal.”

The good news

  • Existing home sale supply shortage

This doesn’t sound overwhelmingly positive, but if we compare it to the overabundance of supply prior to the housing crisis of 2008, we’re in a much better place. Back then, there was a lack of demand and too much supply. Now, both supply and demand are lagging, which balances things out.

  • Housing market is much more resilient than 2008

Home prices are back in positive territory and homes are still gaining equity.

  • New home sales trending higher

Unlike existing home sales, new home sales are nowhere near 2010 levels. They are trending much higher and are currently in line with pre-pandemic levels.

  • Fed done hiking rates (…?)

It’s likely that the Fed is done hiking rates, though this could change if the economy is looking overwhelmingly strong (think higher jobs data numbers and inflation). But even if there is one offset report that’s stronger than the others, the Fed is prepared for it. “As long as inflation continues to moderate and the economy doesn't accelerate at an unsustainable level, they're pretty sure they're done hiking rates,” commented Graham.

It's important to remember that the federal funds rate (the rate that the Fed hikes) does NOT directly correlate to mortgage rates. So just because the Fed is likely finished with rate hikes doesn’t mean that mortgage rates won’t climb higher. It’s more a good sign that the economy is headed in the right direction according to the Fed, and economic strength does impact rates. This coupled with the good news that the housing market isn’t 100% comparable with that of 2008 are both hopeful signs for mortgage rates and housing affordability. What are your thoughts or concerns? Let us know and we’d be happy to help! 

Sources: Bloomberg, Mortgage News Daily, Mortgage News Daily, Mortgage News Daily