Fear can be immobilizing so when it strikes, it’s important to stop it in its tracks and let facts inform your actions instead. A lot has happened this week so to help you replace fear with facts, we’ve summarized the state of the housing market to help clear up how the fast-spreading coronavirus (COVID19) continues to impact the mortgage industry.
Confusing Interest Rates
Rising interest rates have confused a lot of people since the Fed recently cut its benchmark interest rate to a range of 0.25% to 0%. So, what happened?
- Market movements are unpredictable right now. We’ve seen a lot of dramatic movements over the past few weeks, both up and down.
- Influx of eager customers looking to refinance their current home loan to get a lower rate and ultimately save money. Since the demand for refinancing shot up at a record-breaking pace, interest rates increased as well. Again, we are seeing rates move up and down multiple times each day!
- The Federal Funds rate is very different than mortgage rates. For the most part, mortgage rates do not track the Fed’s movements directly. Instead, rates usually follow the direction of longer-term bond yields like the 10-year Treasury note whereas the Federal Funds rate is mostly tied to the cost of money for one day.
- We saw stability return to the Mortgage-backed Securities Market (MBS) when the Fed announced they will purchase as much U.S. debt as necessary to help stabilize the economy. This includes buying mortgage debt to help ease disruptions that have escalated since the viral outbreak.
How the Mortgage Market Works
- The pressing issue with the mortgage industry right now has to do with the capital that’s needed by all mortgage lenders to function and to meet regulation guidelines to continue to lend.
- Most mortgages end up for sale at some point as part of the Secondary Mortgage Market (which is extremely large, liquid, and complex) where the end goal is to sell them as securities to investors. Investors are the end-users of mortgages (i.e. Fannie Mae, Freddie Mac, the Federal Housing Administration, U.S. Department of Agriculture, the Department of Veterans Affairs, etc.)
- The Fed must temporarily slow down MBS purchases to allow lender pipelines to clear to help normalize the effects of COVID19 in the coming months.
What’s Happening This Week
- The coronavirus outbreak, social distancing, and the volatile market has seriously cut into home buying demand in the U.S., but the spring housing market remains active for now. Refinance activity also remains high.
- After intense negotiations, the Senate and the House of Representatives passed a historic $2 trillion stimulus plan to help deal with the fallout of COVID19. This economic stabilization measure will deliver $1,200 payments to millions of Americans who are out of work during this time.
- There are things going on in our stock market that we’ve never seen before which leads to more uncertainty and market volatility. Stricter measures to contain the spread of COVID19 could lead to a more negative outlook toward the economy in the short-term which would support a pullback in mortgage rates, but this remains unpredictable.
The Bottom Line: The Market Always Rallies
The market has taken hits before. And guess what? It has historically always bounced back. Let’s reflect on what we’ve learned in the past that will help us now:
- 2001: During the dot-com bubble collapse, U.S. home prices didn’t drop at all. They kept rising when the Nasdaq saw an almost 77% drop, resulting in a loss of billions of dollars and several internet companies to go bust.
- 2008: Unemployment skyrocketed, businesses failed, home prices dropped, and the recession dragged on for well over a year. The drop in home prices occurred before the U.S. economy went into a recession and in part, this was ultimately a huge issue that helped to spiral us into a that particular recession.
- Today: We usually don’t know we’re in a recession until after the fact. Since history doesn’t show a direct correlation between a recession and home prices dropping, it’s hard to tell what is going to happen right now. Local housing markets will vary across the U.S since some markets are more vulnerable than others.
There’s no way of knowing how long this will all last, and we’re all experiencing anxiety, fear, and worry about the days ahead. But hope is greater than fear and it’s important to rely on the facts during this trying time. Stay healthy and we’ll continue to update you on current information since things are changing at a rapid pace.
It’s now time (more than ever) to have someone you trust in the mortgage industry on your side. Fill out the form below if you would like to speak to a Home Loan Specialist about home buying or refinancing opportunities.