Mortgage Rate May Hit 6% This Year

The Fed last week shook up the markets BIG-TIME, first with comments from Vice Chair Lael Brainard last Tuesday. Lael is considered a strong “dove” so her comments were shocking to say the least. She said the Fed needs to start reducing its balance sheet as soon as May and that they will shrink their portfolio faster than they did from 2017-2019. She is also in support of a 50 bp rate hike at their May meeting.

San Francisco Fed President Mary Daly said that high inflation is as harmful as not having a job and pledged rate hikes ahead. At the end of February Mary said that she doesn’t see a long painful period due to inflation. WOW! In 6 weeks everything changed. I guess it took her that long to dig her head out of the sand when it comes to realizing that inflation is NOT transitory.

Then, last Wednesday the Fed released their March Meeting Minutes and revealed that the Fed is planning to shrink their balance sheet by $95 billion a month, with $60 billion in Treasuries and $35 billion in mortgage bonds. The $95 billion reduction will be phased in over 3 months.

Last year the Fed was receiving on average $70 billion a month in principal payments and loan payoffs and they were purchasing more mortgage bonds using this money. Jefferies chief economist Aneta Markowska believes that the Feds runoff of mortgage bonds this year will slow to about $20 billion a month as refinances grind to a halt. This means to meet the Fed’s goal of $35 billion reduction a month means they must outright sell $15 billion a month in mortgage bonds. OUCH! Don’t be surprised to see mortgage rates hit 6% this year.

Deutsche Bank said last Tuesday, “We no longer see the Fed achieving a soft landing. Instead we anticipate that a more aggressive tightening of monetary policy will push the economy into a recession.” They were not alone in their assessment. And when recessions happen, mortgage rates drop; but if rates get to 6% they may only drop into the 4’s then.

As a co-worker says—"Remember, you can’t refinance your purchase price, and you can’t refinance your rent, but you can refinance your rate when they come back down.” So, don’t wait any longer to buy your new home.