Portland Mortgage Market Update — December 15, 2023

Happy Holidays and I hope you had a great week! Here is this week's market update:

This week has been HISTORIC for rates! Wednesday and Thursday showed one of the biggest drops in mortgage rates in all of history. For as long as they have been keeping records of rates, the only other time rates dropped this quickly (aside from the pandemic) were twice in the early 80's when there were three commonalities with this week's drop:

• Rates started at a level that was higher than they had been in a long time • Rates were at their peak due to an aggressive lead-up surge courtesy of the Fed and • Rates dropped as the financial market was considering a "pivot" in relation to inflation and the Fed's commensurate response

Wait, the Fed said they are going to start cutting rates? Well, not exactly. They didn't explicitly say they are going to start slashing rates, but Fed Chair Powell did say they would likely start their rate cuts BEFORE inflation reported at their 2% target (it is currently coming in at 3.1%). The US economy is like a giant cargo ship-it doesn't exactly turn or stop on a dime. So, think of the aggressive rate hikes from earlier this year as the Fed slamming the brakes to rein in inflation, and only now is the tanker coming to a stop. BUT, it is imperative the ship does keep some momentum since an outright stop would lead to a recession. So the Fed is "coasting" for a bit until they can open up the throttle by dropping rates. Currently the market is betting there will be at least 50 basis points (.50%) cut in rates by May of next year and by 75 basis points by June.

Got it, so we should tell our buyers to wait for rates to drop… NO!! Absolutely not. Rates BARELY dropped below 7% this week and we saw a 19% gain in refinance activity from the week before. If your buyers are waiting to see rates in the 5's before shopping for a home, they will be up against a slew of other buyers that have likewise been waiting. They should be looking now, because the sales price of a home is permanent, but the loan is temporary. Consider the following scenario: a first time homebuyer is looking for a home and finds one today in the $450K range with an FHA loan at 3.5% down. Based on today's rates, their payment may be around $3600/mo (all in). But they want to wait a couple of months for rates to improve- that same house gets in a bidding war and is now at $470K. With rates improving .5% the payment would still be around $3600K, but they would owe almost $20K more on that loan. If they were to buy now at the higher rate/ lower sales price then refinance at that .5 lower rate the payment would be closer to $3450/mo. And that is includes the refi's closing costs that would be financed!