Hey there, let’s talk about the recent news in the banking industry and how it’s affecting mortgage rates. It’s no secret that concerns about the banking sector in the US and Europe have been causing some unease among investors. This uncertainty has led many to shift towards relatively safer assets, such as bonds, which has ultimately been favorable for the mortgage market.
As anticipated, the Fed held its meeting last Wednesday and more or less stuck to the expected script. The market reaction was minor, and, as a result, mortgage rates ended the week lower. You can check out the rate sheet for the week ending 03/24/2023 to see for yourself.
Given the recent troubles in the banking industry, the Fed’s meeting was even more highly anticipated than usual. Investors were eager to see how the Fed would balance its objectives of bringing down inflation (requiring tighter policy) and helping support the banks (requiring looser policy). As expected, the Fed raised the federal funds rate by 25 basis points to a target range of 4.75% to 5.00%, the highest level since September 2007.
It’s important to note that the federal funds rate affects short-term lending directly and not necessarily longer-term lending such as mortgages. Mortgage-Backed Security (MBS) prices determine mortgage rates. So, with the Fed’s rate hike, you can expect your short-term debts, such as credit cards, personal loans, and Home Equity Line of Credit (HELOC), to go up this month. The prime rate is now at 8%.
The Fed will continue to do whatever is necessary to bring inflation back to its target level of around 2.0% annually and maintain stability in the banking system. Chair Powell explained that banks would likely be more selective now, leading to fewer loans to businesses and consumers. It’s too soon to tell how much tighter lending standards will slow economic growth, but it could “easily have a significant” effect. In short, the Fed chose to preserve its flexibility in making future policy decisions.
In housing news, sales of existing homes rose in February for the first time in twelve months but were still 23% lower than last year. While they were 15% higher than a year ago, they stayed at just a 2.6-month supply nationally, far below the roughly 6.0-month supply typically seen in a balanced market.
This week will be light on economic reports, with Consumer Confidence coming out on Tuesday and Personal Income and the core PCE price index (the inflation indicator favored by the Fed) being released on Friday. Investors will be keeping a close eye on the banking sector to see if troubles spread to other institutions. They will also monitor if Fed officials elaborate on their plans for future monetary policy.
In summary, the recent news in the banking industry has changed everything as it relates to the Fed and rate hikes. The turmoil in the banking industry brings uncertainty and volatility, and the market doesn’t like any of it. As a result, investors usually shift to safer assets such as bonds, and bonds affect mortgage rates. Mortgage-Backed Security (MBS) prices determine mortgage home loan rates. As the price moves higher, rates move lower, and vice versa.
Overall, this is good news for the mortgage industry as it foresees the Fed cutting rates in the second half of the year, a big change from the rating outlook just a few weeks ago. As always, keep an eye on the market and stay informed to make the best decisions for your financial situation.