Hello Ryder Mortgage Groupies!

As we head into fall thought that I should send a note on what I see ahead regarding mortgage rates and the housing market as we finish up 2023 and head into 2024.

First, lets look back. For those that follow me on LinkedIn, or read my articles at The Scotsman Guide (a Mortgage Industry publication), back in April 2022 – back when mortgage rates were still in the 4’s, I said mortgage rates would reach as high as 7.625% in the summer of 2023. We got there a few weeks back.

I also forecasted that despite rising rates, we’d see a stable housing market. Despite the crazy mortgage rate headlines, the forecast rang true as well. For some odd reason – I was the first to be able to put together those puzzle pieces.

In the Spring of 2022, those two forecasts inadvertently were seen by folks outside of my circle – and well, fast forward to today, it’s you all that I was really providing those for; but I’ve been asked to share my data and methodology to fellow industry nerds. The 'why' behind my foreceasts have now been shared inside of national webinars by more than a few top lenders - so "I think I think" folks are starting to adopt my approach to how we might be thinking about the upcoming two or three quarters.

Here's what I'm looking at:

Last year’s correctly called forecast was based on looking at similar economic trends that surfaced in the late 70’s and early 80’s (more on that in a sec). We had to go that far back to see such an economic boom as the one that we saw post-Covid.

Now, let’s look forward. Even though Federal Reserve Chairman Jerome Powell states that he believes in a soft-landing, the data is (in my opinion) pointing in another direction. The last time our country saw the Federal Funds Rate rise this fast? You guessed it... back to when disco ruled the AM radio dial. To be exact – it was the Spring of 1980 through early 1981. July of 1981 started a recession that lasted 18 months until November of 1982. I think its still prudent to compare where we might be headed to what happened then.

According to FederalReserveHistory.com, what caused that specific recession was “tight monetary policy in an effort to fight mounting inflation". Sound familiar?

If we simply stick to the same “past behavior is the best predictor of future behavior” forecast modeling – I think our country will be in a recession starting in June of 2024.

Below are some crack's that we see in Chairman Powell's Soft Landing Dam:

1)     Alignable.com reports that 40% of small business owners weren’t able to pay their rent on time or in full last month. That number rises to 47% when you look at small retailers.

2)     As of the end of Q2 2023, US Consumer Credit Card debt had risen to $1,030,000,000,000. The average credit card interest rate is at 28.06%. That is up from 22.16% in March of 2023.  To put that in perspective, if each dollar of interest represented a penny to be stacked on each other, that is enough annual interest to reach the moon! A more tangible way to think through it, is that there are 260,836,730 adults in the US – that means on average each adult is paying over $1,100 in just credit card interest each year. 

3)     Average 12 Month Certificate of Deposit Interest rates have risen from 0.36% in March of 2022 to 1.72% today. The last time we saw CD rates rise this fast was just prior to the 2008-09 recession. Why is a rising rate on a CD a marker of a recession? It shows that banks and credit unions are running out of money to loan out. You see a bank has to have a certain amount of money on hand at all times that is calculated off the outstanding loans that they have owed back to them. The way they attract money INTO the bank (and to tie it up for a specific amount of time) is to offer higher interest rates. If you had for example $100,000 lying around, and wanted a extremely low risk investment, you’d probably put it in a CD. You’d compare Bank A vs. Bank B, and deposit it for a year in the bank that gave you the higher interest rate. Banks need your money to stay in business.

If we go into a Recession, what does that mean for Mortgage Rates?

In 7 of the last 8 recessions, mortgage rates rose pre-recession (like they are now), and then fell once firmly inside of the recession. As I stated earlier, we aren’t in a recession yet – so its very likely for the next 6-8 months we’ll see rates stay where they are, or the more likely scenario is that we’ll see them get even higher (my opinion is counter to what other forecasters are stating once again). Simply following the 1980-81 models and applying it here, it's likely it won’t be until at least June of 2024 that we see rates start to decline.

If we go into a Recession, what does that mean for Home Prices?

Remember, there is a difference between economic recessions and full-blown depressions. I haven’t seen a forecast for an all-out Depression by anyone. Home Prices are surprisingly resilient in recessions. In 1980-1981, the average principal and interest

payment on a home in the US rose 44% (sound familiar?). Despite that rise in payment, according to HUD’s data, home prices rose 6.02% during that same period.

If you are thinking back to 2008-09, and expecting the housing market jolt in pricing like that time period; remember that that recession was a result of shady lending practices, unregulated banking, and folks having no equity in their homes- that's a far different scenario than today. 

Heading into 2024, I’ve seen data suggestings as big of a drop of 5% in housing prices - and also as high of a 5% increase of price heading into next year. Supply remains limited because no one is willing wanting to give up the rate they got on their home a year or 2 ago. That will continue to limit supply for those looking (or needing) to upgrade their homes, which then limits supply further down the chain to first time homeowners. If there is anything the housing market learned this year – its that if supply is lower than demand – regardless of economic conditions, prices remain stable.

El fin! :-) Thanks for reading! When investing, always speak to a Financial Advisor.  There are 26 super computers that predict the weather. Just imagine how many there are out there for financial forecasting! And even then we don't always get it right!