Fed Funds Rate Stayed the Same
Good news for mortgage interest rates in May with the Federal Reserve leaving their target rate, The Fed Funds, in the range of 5.25% – 5.5%. The Fed did not increase the Fed Funds as some in the media had predicted even though the Fed did acknowledge that progress in reducing inflation has stalled. With the economy continuing to improve and strong job numbers, the Fed is still waiting to cut their target rate until they feel confident that inflation is heading towards their desired 2% rate of inflation.
Fed chair Jerome Powell was clear in not needing to increase the Fed Funds from the current level of 5.5% while waiting to see inflation come down further. He indicated that it would be possible for a rate reduction if unemployment increased more than a few tenths of a percent from the 3.8% April unemployment figure.
Changes Anticipated in June
Mortgage rates did get some good news when Powell announced that the Fed would slow their balance sheet reduction starting in June of this year. The Fed had been purchasing large amounts of treasury bonds from the markets during the pandemic to suppress mortgage rates. Post pandemic recovery, the Fed had been selling off $60 Billion a month in treasury bonds, which had helped to keep mortgage rates around the 24-year high levels we have experienced over the past year and a half. Instead of selling $60 Billion in treasury bonds back into the markets each month, the Fed will reduce that amount to $25 Billion.
Reducing Treasury Bonds
Reducing the supply of treasury bonds into the market will help reduce the bond yields, the amount of interest bonds pays out, and those yields set the basis for mortgage rates. Immediately upon this announcement, we saw bond yields decline and average 30 Year Fixed mortgage rates fell below 7% APR again. I have been pricing 30 Year Fixed loans back into the 6.5% APR range and we have a chance to get below that once the Fed balance sheet reductions begin in June.
Alternative Solutions for High Rates
While it’s true that the high interest rate environment is making it difficult for some home buyers to purchase real estate, there are solutions that exist that sellers are open to in the current market.
- SELLER CARRY 2ND MORTGAGE
One of these is a seller carry, second mortgage that can be written at below market interest rate and combined with a conventional lender mortgage to help reduce the qualifying mortgage payments. The seller carry second mortgage can increase the amount of income the seller earns from the sale and can be a waiting game of only five years to receive the rest of the equity, plus interest, from the sale. - SELLER CONCESSION FOR BUYDOWN
Another way the seller can help is to give a concession to the buyer to pay for a temporary interest rate buydown on the conventional lender mortgage in first position. The seller concession for the temporary buydown can be negotiated into the sales price so the seller can still net out the full amount of equity from the sale. - CONTINGENT SALES
I am also seeing more sellers willing to sell contingent on the buyer selling their existing home. With some properties sitting on the market for long periods of time at the higher price points, sales contingent on the buyer selling their home is coming back to the market.
Off to Indonesia for SCUBA!
I am heading out to Indonesia for a few weeks at the end of May and beginning of June for some epic SCUBA diving. I will send some pictures for the July issue. In the meanwhile, here are a few pics from May 11 off the coast of Kona. My first whale shark in over 15 years of diving there. Enjoy!
As always, your mortgage guy,
Viral (Vic) Joshi
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