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Market Risk as it Relates to Housing and Interest Rates

Market Risk as it Relates to Housing and Interest Rates

I have been keeping a close eye on the housing market and the path of interest rates in conjunction with what the chairman of the Federal Reserve has had to say since early this year.  Last week, it was reported that the volume of transactions through July for housing was down six months in a row.  The Fed has been very vocal that they want housing prices to soften.  The problem with the current data is that housing activity may be declining but housing prices are not.  Herein lies the problem.  Housing is connected to large swaths of the economy.  The Fed wants housing prices to soften to help them with their war on inflation.

The Fed’s current plan is not yielding any signs of progress toward their telegraphed objective with housing prices.  The risk, as I see it, is that the Fed may seek to press rates higher to force their objective and adversely affect housing prices.  This will occur through additional short term rate increases, jawboning to the media their intentions, and the outright withdrawal of liquidity through Fed balance sheet reduction expected to double in September.  This means that the risk this Fall is for higher mortgage rates.  I see a possibility that rates for mortgages could rise a percent to a percent and a half over the recent peak.  This could put the rates in the seven plus percent range.  This, in my opinion, would definitely affect housing and I believe also pressure supply and demand to the point that prices would also soften. 

What does this mean for you?  If you are in the market for a home, regardless of the mortgage loan type, there may be an increased sense of urgency.  Again, the Federal Reserve has telegraphed their expectations.  Home prices are the issue.  It is odd that prices would not be affected at this point in the cycle of Fed tightening.  It is clearly related to the extreme amount of excess liquidity in the system.  It’s the Fed’s next move.  I see rate risk to the upside.  What are your thoughts?  Comment below.


George H. Omilan
President-CEO - NMLS# 873983
Jefferson Mortgage Group LLC

Reverse Mortgage Specialists - Virginia, Maryland, Florida & Pennsylvania (Jumbo Reverse Mortgages - VA, FL & PA only)

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