The interest rate conundrum
First, mortgage rates fell to historic lows in 2020 and turned the already tight housing market into a feeding frenzy. Then, in 2022, rates soared to keep up with inflation and reduced affordability pushed some buyers away.
However, higher mortgage rates are actually the best thing to help buyers and rebalance the market, according to Logan Mohtashami.
We recently spoke with HousingWire’s senior analyst and former loan manager about how far he thinks rates will go, how the market looks like Hungry Hungry Hippos and why any talk of a housing crash is ridiculous.
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Meet the expert
Logan Mohtashami is a data analyst and financial writer covering the US economy with a specialization in the housing market. He has worked in lending and housing since 1996 and is currently a senior analyst for HousingWire.
Mohtashami shared his thoughts on the impact of rising mortgage rates on the entire real estate industry in a Q&A with The Mortgage Reports. Responses have been edited for brevity and clarity:
How high will 30-year mortgage rates go in 2022?
The 10-year Treasury yield has not returned to the highs we saw in 2018, but mortgage rates are higher. I think that’s the big gap and the mortgage market is showing price stress.
This mainly means that if the market stabilizes, [mortgage rates] shouldn’t really go above 6% or, really, above 5.875%. If growth and inflation pick up further, it will change bond market dynamics.
But there are plenty of near-term issues facing the world that should eventually ease: inflationary pressures, the Russian invasion, and the Federal Reserve have also become much more aggressive.
The market has priced in much of what the Fed wants. The question is, can economic growth stay strong enough to justify these rates and returns? I think that’s the battle for the rest of the year.
Do you have a prediction on when rates might stop rising and stabilize?
We are playing tug of war right now on rising rates and inflation. Typically, new home sales and housing starts fall before each recession. Rising mortgage rates are going to be problematic for builders, and we can already see from the survey data that they are aware of this.
We’ll see in the second half of 2022 as some of the frontline data starts to weaken and inflationary pressures start to ease a bit. There are limits to what the US economy can do.
If there was no Russian invasion, no Shanghai shutdown, it would be a much clearer picture right now. So it’s not as clear what the Federal Reserve is doing – but it knows it would be difficult to raise rates in a recession, regardless of the inflationary data.
Do you think these higher rates will cool the market?
Higher rates are desperately what we need because the house price growth we are seeing is so wildly unhealthy. We have to find ways to create a slowdown and higher rates are the best way.
Traditionally, two things happen with higher rates: Days on the market increase. We are still in the teens in the market and it’s too fast. And second, the rate of price growth drops.
Sales are expected to trend lower in the existing home sales market. The market for the sale of new homes is more problematic with higher rates, especially with all the backlog of deliveries. Some of these houses are actually there without a rate lock. Now the buyer has to qualify at 5%, so people should look for cancellation rates on new home sales.
“Traditionally, two things happen with higher rates. The days on the market are growing [and] the rate of price growth is falling”
We hope to see a slowdown in real estate activity. The question becomes how much will the inventory increase? Inventory is very seasonal and I believe that as long as rates remain at this level, we should finally see positive inventory year over year in 2022. What would be bad for housing is if the Mortgage rates fall and whatever inventory is created, we gobble up.
Mortgage rates below 4% have given us cumulative house price growth of 35-40% in three years. It’s the worst housing market after 2010 that I’ve seen simply because of the sheer shortage of housing. That’s not what you want to see.
How do you see rates and demand evolving in 2023 and beyond?
So 2023… I’ve always referred to the years 2020 to 2024 as having the best housing demographic patch in history with the largest 20-34 age group ever at 32.5 million. It should have at least 6.2 million new and existing home sales, and that should be a given.
The question is, where is the balance? Because if rates come back down, it will benefit demand. If rates stay high here and stocks rise slowly, it won’t do much. People need to have a choice and wages need to rise to keep rates higher.
Home prices have risen far too quickly over this two-and-a-half-year period because there are too many people looking at too few homes. Then, rates also rose rapidly, so housing demand is expected to subside. Hopefully, over time, demand will slow down and sellers will become more realistic about the price of their home.
Is there a housing bubble brewing in 2022, as the Dallas Federal Reserve has said?
I read the Dallas article and loved it. They’re much calmer than me about the housing market, but they talk about the same things, like there’s no excessive debt. Anyone who says real estate is going to crash needs to pick a point where the bubble started and prices need to get back there very quickly.
The reason I’m not a fan of the housing bubble is that there just aren’t enough products and there are too many people looking. That’s the difference between this and say 2002 to 2005, where there was too much credit.
“It’s impossible for me to say ‘housing is a bubble’ because at least 8-10 million people…would need to deliberately sell their homes at a steep discount”
In 2008, credit deteriorated in America, which meant people were filing foreclosures and bankruptcies. Then the recession of job losses added to that.
It’s impossible for me to say “housing is a bubble” because at least 8-10 million people earning over $100,000 would have to voluntarily sell their homes at a huge discount. Nothing in the data shows that this is the case. This is why the credit crisis of 2005 to 2008 is really an important story. It’s no longer the case now.
I just threw in the towel on the market because we lost our minds. A house here in Los Angeles had 125 people watching it. Higher rates must piss off home sellers and home builders because their pricing power is too strong. That’s why I like higher mortgage rates to create balance, more inventory, more days on the market and bring people back to reality.
What we’ve seen this year looks like Hungry Hungry Hippos with just one or two bullets. You are forced to bid on a house now, when you were forced to sell your house after the housing bubble collapsed. Two different markets, both extremely unhealthy.
What advice would you give home buyers right now?
I always say if you ask someone else if you should buy a house, you’re not ready. Follow your own instincts. There will be a time in your life when you are ready to go.
The bottom line
Today’s housing market is tough for buyers, especially newcomers. But raising interest rates could be the right thing to do and help exploit the exorbitant growth in house prices over the past two years.
As always, preparation is your friend, and getting pre-approved for a loan will jump-start your process.
If you’re ready to buy (or even thinking about it), contact a lender to determine your next steps and what you can be approved for.
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