Market Watch

Interested in interest rates?


For those of us watching mortgage interest rates, 2022 couldn’t end soon enough.

Last year, saw a steady progression of rising interest rates in response to the pandemic economy. The Federal Reserve raised the Federal Funds rate seven times. The funds rate is what banks charge one another to borrow money overnight. Banks lend each other money to maintain reserves. This rate affects consumers because banks have to charge a margin over and above the Federal Funds rate.

Mortgage interest rates on home equity lines of credit (HELOC), refinances and purchases increase with the funds rate. We saw the dramatic increase in residential mortgage interest rates last year because the Federal Reserve began aggressively raising the funds rate.

Before going any further, I need to stress individual interest rates for residential mortgages vary depending on several factors. Among them are the property type, whether a stick- or block-built single-family residence or high-rise condominium, for instance. Additional factors are the proposed residency of the property, either primary, second home or investment. Credit score, loan amount, loan to value are also factors. This article does not address a particular mortgage situation. Instead, it relays the recent Federal Funds rate history and speculates on the 2023 interest rate activity. I can be contacted about your particular interest rate situation by using the phone number or email in the accompanying display ad.

The current 4.5% Federal Funds rate resulted from several rate increases by the Federal Board of Governors in 2022. It’s hard to believe as recently as March of last year the funds rate was 0%. Two previous years of extraordinarily low rates orchestrated by the Fed’s reaction to the pandemic came to a screeching halt less than 12 months ago.

The question everyone is asking is whether Jerome Powell and the Federal Reserve will continue raising the rate this year, and how much? It’s impossible to predict interest rates, but I will do my best to explain how the Fed affects them, and that effect on the Ponte Vedra Beach and St. John’s County housing market.

There was a 16% decrease in St. John’s County home sales between 2021 and 2022. Northeast Florida Association of Realtors (NEFAR) reports 7,424 residential sales between Jan. 1 and Dec. 31, 2022. In the same 2021 period, 8,750 sold, a 1,326 year-over-year decline*. I will update this data in a future Sand Castles Market Report for 2023. The reduction in local sales is evidence of the negative impact of rising mortgage interest rates.

The Federal Reserve is mandated by Congress to keep prices stable and maximize employment. Their reasoning behind raising rates last year was to reduce the inflation created by the accelerated printing of money and 0% Federal Funds rate during the pandemic.

Economic analysts argue the 2.5% Federal Funds rate from 2018 is “normal.” With the prediction of the current 4.5% increasing to 5% early this year we can expect to see the Fed begin the correction down to a normal rate later this year either in the third or fourth quarter.

When this begins happening there will be a positive impact on the local housing market for two reasons. The first because sellers who have been sitting on the sidelines to sell will list their properties, and secondly because buyers will feel confident they are getting a better rate than 2022 and early 2023.

More buyers will be able to qualify because lower interest rates result in lower monthly principal and interest mortgages payments. As sellers finally sell their current homes, it will create a new set of buyers looking to buy their next home.

Second-home and investment-property interest rates, which are normally higher than primary-residence rates, will become more appealing to people looking to have a Florida dream second home in addition to their primary residence. Investors will be able to capitalize on their more affordable investment carrying costs. Declining interest rates will have a positive impact, and it can’t happen soon enough for the local housing market industry — which, by the way, is such an important U.S. industry to our economy that the Federal Reserve are involved to begin with.

One indication of declining rates is the Consumer Price Index (CPI) falling into negative territory last December for the first time in 2022. This was an encouraging development because inflation is closely related to CPI. Conventional wisdom is if inflation shows signs of decreasing, the Fed will begin lowering the funds rate. The next CPI data released is Feb. 14. Before this, the Federal Board of Governors will meet Jan. 31-Feb. 1. I do not expect the Fed to increase the funds rate more than 0.25% or 0.5% in February based on their apparent successful taming of CPI in December.

Also, worth noting when one considers how much more the Fed will raise rates is the increased political scrutiny of the Federal Reserve by both Democrats and Republicans.

Neither party wants to see its constituents’ households suffer any more than absolutely necessary to control inflation. If it appears the Fed is overreaching you can expect to see heated responses from the House, Senate and President Biden.

The following quote from UBS sheds light on the political tightrope Jerome Powell walks:

“The Federal Reserve is also under scrutiny from both sides of the aisle. Senator Warren released a statement critical of the Fed's rate hikes on December 19, saying, ‘Fed Chair Powell’s extreme interest rate hikes risk pushing our economy into a recession that costs millions of Americans their jobs. The Fed needs to remember it has a dual mandate: fight inflation and protect jobs." Republican Senator Toomey and Democratic Senator Warren joined forces to introduce legislation this month that would subject the regional Federal Reserve banks to more oversight**.”

Chairman Powell and the Board of Governors will find it increasingly challenging to pursue hawkish interest rate increases if job growth continues to decline due to the U.S. economy contracting.

Economists at UBS predict a total of 0.5% increase to the Federal Funds rate by mid-2023, and for reductions to begin as early as third quarter of 2023 as the labor market continues to decline with rising unemployment ***.

In conclusion, if the labor market weakens, and CPI date continues to decline, we will see mortgage interest rates begin improving later this year.

The Fed probably has another 0.5% increase to go before reaching 5%. It might happen in two 0.25% increases or one 0.5% increase. Then we can expect to see a steady decline back to the normal 2.5% from 2018. Creating the potential for refinances as people were forced to take a higher rate in 2022 and 2023 rush to the relief of lower rates and resulting mortgage payments.

In my opinion, as this happens the real estate market in Ponte Vedra Beach and greater St. Johns County will heat up again as pent up demand for people to sell their homes is released, and buyers are encouraged by improving interest rates.

Our county is a very desirable destination for retirees and remote employees looking for the enviable Ponte Vedra public school system and beautiful beaches and weather.

The housing market will improve after residential mortgage interest rates stabilize in conjunction with the Federal Funds rate. Until then as real estate professionals, we continue encouraging clients that it’s not a bad time to buy because of the ability to negotiate with sellers, stabilized sales prices compared to the previous two years, and increased inventory. For those who want to wait until the market improves because of lower rates I believe they won’t have to wait much longer. Either way, this is still an amazing place to own a home.

David Johnson is a Mortgage Banker with Ameris Bank, NMLS #1446956.

*NEFAR Multiple Listing Services

**UBS Global Research and Evidence Lab, 29 December 2022

***UBS Global Research and Evidence Lab 29, December 2022


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