War is horrific. And besides the innocent victims of violence, there are trickle down effects into other parts of life. Like housing.
We thought we were almost through the worst of the housing market. In just a few more months, many people expected rates to start trending down and finally regular people could buy homes again.
Millions of people would like to buy a home right now, but they can’t.
The median priced home in the US for someone who needs a mortgage, will cost almost $4000 a month because of today’s interest rates.
Just when we thought things were going to get better, war breaks out in the Middle East.
Housing prices are local… they don’t move too much based on international events.
But interest rates? Instability like this can have a big impact on mortgage rates. But which way will they go? Up, or down?
We’re going to look at three conflicting opinions about what is going to happen.
Then I’m going to share a conversation I had with my preferred lender Brandon Kelly at Cross country Mortgage (You’ll need to watch the video above).
We talked about the two things that are impacting rates right now in regards to the Middle East. I’ll be honest, we didn’t really agree with each other about what rates are going to do, but then he shared a specific resource that he looks to when he isn’t sure and he definitely gave me some hope about where things are going.
Three Opinions about the Effect of War on Interest Rates
This week, Janet Yellen, the US Treasury Secretary, said that it is really too early to tell what the impact of the conflict will be. She simply said, “I think it’s too early to speculate what the consequences will be.” But she didn’t seem alarmed.
Larry McDonald, author and founder of the investment advice “Bear Traps Report” thinks Yellen is not telling the truth. He said, “You could say it’s irresponsible because she’s not being honest. . . At the end of the day, this is a conflict that, really, the probability that it goes away in a short period of time and the probability that it doesn’t escalate is low.”
McDonald believes that the middle east conflict is one of three elements that will stop the FED’s rate hikes in their tracks and that they will be forced to cut rates by next year. This could be good news for home buyers if the FED is forced to cut rates earlier and more significantly than they had planned.
But David Ress at Schroders disagrees with that outlook. He sees the conflict creating higher oil prices, fueling a wage price spiral, which will make the FED keep rates higher for longer. He wrote “Higher commodity prices [oil prices going up because of the conflict] lead to an increase in inflation, while the risk of second round effects (i.e rising wages and prices) against a backdrop of tight global labour markets would tip the balance at central banks towards some additional rate hikes. Those lingering concerns about ingrained inflation would also delay the eventual pivot to rate cuts until later in 2024….[this would all] result in slower growth, creating a stagflationary outcome.”
“Stagflation” is a scenario where there is high inflation and high unemployment in an economy that isn’t growing. So, in that scenario, home buyers will continue to deal with higher rates for longer.
Now let’s look at my conversation with Brandon. (You really need to watch it above, but here’s the gist of it.)
- The first thing we talk about is that the initial reaction to unrest, is generally going to be investors moving their assets into safer investments, and that usually means mortgage rates go down.
- However, investors weren’t as motivated as to choose safer investments as we expected.
- But the other thing that happens in these kinds of situations is market volatility, which means things can change.
- When things are hard to predict, a good place to look for guidance is to follow the money. We can learn a lot by looking at what banks are doing with their money.
Banks have a problem.
If they charge too many fees, people won’t get approved for the loans and banks won’t make money.
But if they DON’T charge the fees, and people refinance within a year or so, they won’t make money.
So they have two risks.
Choosing to charge up front fees, even though it eliminates some people from the buyer pool, tells me they believe pretty strongly that people buying right now are going to refinance in less than a year.
They think rates are coming down.
Now as Brandon said, they’ve been wrong this whole year about what rates are going to do.
But the longer they are wrong, statistically it becomes more likely that they are right this time. At least it seems like that should be true!
Even a broken clock is right twice a day.
