Here Are Three Things Pointing to a Better 2023
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By Ryan Casey Stephens, FPQP®
Special Contributor
Welcome to the start of a new year, full of excitement and opportunity. The last 12 months were tough on all of us, but I’m feeling bullish about the season ahead. If you asked me one year ago, I’d never have predicted the events we just experienced, so take my assessment of the present with a grain of salt. That said, I believe 2023 is going to be a year of stabilization and improvement. Let’s discuss why I feel that way in this week’s Three Things to Know.
A Definite, Beautiful, Needed Recession.
The signs are everywhere around us — American savings accounts are down more than $800 billion, credit card debt in the U.S. just saw the largest increase in 20 years, existing home sales and vehicle sales are contracting, and all the measurable yield curves are beyond inverted. If we’re not already in recession we will be imminently, though we probably won’t have official word until next year.
Those facts, and the litany of others that point to our economy shrinking, are wonderful news. We’ve just come off of years of horrible Fed monetary policy that saw historic levels of printing money, stimulus, and garish easing, which created the worst inflation our nation’s battled since the ’80s. A slowing economic environment may be our only hope in cooling the white-hot flame burning away our hard-earned money. As we plunge deeper into the new year and the recession, we ought to see more pleasing inflation readings each month as we begin to recover.
Lower Inflation = Lower Interest Rates
Slower consumer spending isn’t the only thing helping in the fight against inflation. More than a third of the CPI inflation report consists of “shelter costs” — a key example being rent. It averages the last year of rent cost appreciation. One year ago this month, rent was exploding by 18 percent year over year, but by last month it fell to only 4 percent. Leases are usually signed on an annual basis, so each month should see a dramatic improvement in this one metric that makes up just less than half of the CPI inflation data.
Over the last 35 years, the 30-year average mortgage rate is usually 1.75 to 2 percent higher than the 10 Year Treasury, with very little variation from that rule. However, last year that spread increased to 3 percent. What gives? In short, mortgage rates increased so quickly that mortgage servicers didn’t expect those loans to last long. Everyone figured that within a year or two most with 7 percent or higher mortgages would be refinancing, so there wasn’t much money to be made holding those loans. Considering that, rates were increased by an extra percent to make up for the lost future profit.
As we move further into recession, the 10 Year Treasury should fall as it typically does in a shrinking economy. When that happens, the extra 1 percent margin on rates should evaporate, meaning mortgage rates will fall faster than the 10 Year Treasury. The result — the potential to see 5 to 5.5 percent mortgage rates by late spring or summer.
Open The Floodgates!
The last six months of astronomically high payments due to rates and home price appreciation have kept many young homebuyers out of the game. How many? Household formations, meaning young people moving out of mom and dad’s to start their own life, usually average 1.7 million annually. Last year we saw just 1.3 million. Hundreds of thousands of young Americans are sitting in their trenches just waiting for the machine gun fire to let up.
The average of industry expert predictions has home price appreciation hovering around 4 percent and mortgage rates somewhere between 5 and 6 percent. At some point this year we’re going to reach an equilibrium where prices cool and rates ease just enough to permit thousands of eager buyers across the nation to get back in the fight. In simple terms, more affordability will be a trigger for the pickup in activity we all need. Be encouraged, real estate professional — if you’ve made it to this point, you’re nearly out of the woods.
Ryan Casey Stephens FPQP® is a mortgage banker with Watermark Capital. You can reach him at [email protected].
