Is This The Worst of All Worlds? Sadly, Yes - And Here's Why...

Is This The Worst of All Worlds? Sadly, Yes – And Here’s Why…

By Jay Voorhees

May 22, 2023 2 min read

WOW!

Rates rose every day last week even though inflation is clearly falling!

This is particularly surprising because inflation is perhaps the biggest single driver of mortgage rates.

Making matters worse is that inventory continues to tighten, and higher rates only exacerbate the inventory shortage because of mortgage rate lockdowns (where sellers don’t want to sell if selling forces them to buy in a high-rate environment).

So, we can expect even tighter inventory in the near term at least.

This is truly the worst of all worlds for those of us in the mortgage and real estate industries because (1) rates are up, defying falling inflation data; and (2) inventory is at record low levels with no relief in sight.

Over the last few weeks, many firms (both real estate and mortgage) saw record low levels of transactions.

If this was December or January, that would be one thing. But – seeing this in late May pretty much looks like Armageddon.

Why Did Rates Rise When Inflation Is Falling?

Rates rose for two reasons.

(1) Debt ceiling uncertainties pushed up rates for a variety of reasons.

And

(2) The supply of bonds for sale has been surging because of the bank crisis. When the FDIC takes over a failing bank, it dumps a lot of the bank’s bond holdings (both mortgage-backed securities and Treasuries) and this increase in supply has the immediate effect of pushing up rates. In addition, banks themselves are selling bonds en masse in their mad scrambles to raise more capital – pushing rates up further.

Note: We saw the opposite effect in 2021 when rates were falling in the face of rising inflation. This is because a clueless Fed was still buying Treasuries and mortgage-backed securities, creating artificial demand and shrinking supply.