Treasury yields have steadily nudged higher following Christmas and could continue to surge. The 2023 high-water mark for the yield on the 10-year Treasury note was 4.98% in mid-October after which it fell steadily to 3.78% or a 120 basis points by Christmas. Yet the index used in part to determine a federally-insured reverse mortgage’s expected rate has reversed course marching steadily higher over the new year up to 4.14% last Thursday.

And speaking of rates while investors has been bullish expecting that the Fed will cut interest rates this spring, the central bank is saying

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not so fast, at least according central bank participant. Federal Reserve Governor Christopher Waller said, “When the time is right to begin lowering rates, I believe it can and should be lowered methodically and carefully. In many previous cycles … they cut rates reactively and did so quickly and often by large amounts. This cycle, however, … I see no reason to move as quickly or cut as rapidly as in the past.”

If the U.S. economy show signs of slowing or falling into a recession the Fed typically lowers interest rates increases demand for loans and spending while higher rates have the opposite effect cooling an overheated economy or high inflation.

With the average 30-year mortgage rate still pegged just below seven percent and home prices still bloated above their pre-pandemic levels many are beginning to ask- when will home prices be affordable again? Not soon if inventory levels remain low with elevated interest rates. “For the best possible outcome, we’d first need to see inventories of homes for sale turn considerably higher”, says Keith Gumbinger, vice president of mortgage website HSH.com.

However, if the Fed cuts rates too quickly it could crete another surge in buyer demand that erases any inventory gains and pushing home list prices even higher. Yet a more modest reduction of rates over time could bring some semblance of normalcy to the housing market and eventually incentivize homeowners with low mortgage rates to sell. 

One factor that could significantly boost housing inventory is foreclosures. While experts don’t expect to see a wave of defaults in 2024 there are two risks that cannot be overlooked. First, if unemployment spikes more homeowners could find themselves unable to make their mortgage payment or even decide to walk away if their home’s value has dropped considerably. Second, homebuyers who got a 3/1 ARM or adjustable rate mortgage may choose to turn in the keys and walk once they see their fourth-year mortgage payment. Few new homebuyers will have the financial discipline to retire debt during the first 36 months of the loan freeing up cashflow for a higher mortgage payment. Depending on the current interest rate at the beginning of the fourth year borrowers could see their payments jump 20-30% or more.

All things considered 2024 should be watershed year for the housing  and reverse mortgage markets. Both are at a turning point, with the HECM marketplace having a big upside for significant growth in the coming years.

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