Exploring Recent Changes in Mortgages and Housing Prices.
Recent changes in mortgages
In the past few years, due to changing economic conditions, mortgage rates have been constantly fluctuating. The onset of the Covid-19 pandemic in 2020 and 2021 introduced unprecedented challenges that significantly impacted the overall economic landscape. A notable outcome of this situation was the historic decline in mortgage interest rates, which was mostly brought about by the Fed's emergency measures. The main goal of these was to reduce dysfunction in the Treasury and mortgage-backed securities markets, which are essential to the economy's overall credit flow.
In March 2020 the Fed initially committed to purchasing $200 billion in mortgage-backed assets and at least $500 billion in Treasury securities during the subsequent months. Days later, it initiated open-ended purchases, emphasizing its commitment to acquire securities "in the amounts needed." This announcement was an important turn in the Fed's quantitative easing approach and aimed to maintain both the integrity of the market and the efficient implementation of monetary policy.
In June 2020, they showed flexibility in responding to changing economic conditions by setting monthly purchase rates of $80 billion in Treasuries and $40 billion in residential and commercial mortgage-backed securities. The purchase program successfully achieved the Fed's objective of restoring smooth function in the mortgage-backed securities market, since MBS yields quickly dropped and retail mortgage rates reversed, resulting in a steady drop in the cost of financing a house purchase or refinancing.
Thanks to the implemented measures, the Fed successfully lowered mortgage rates to historically low levels, remaining under 3%. However, as inflation rates soared in 2022, this rate unexpectedly changed. Due to their strong correlation with economic data, mortgage interest rates surged sharply to levels not seen since 2002. Freddie Mac data shows a significant increase from 3.22% in January to an astounding 7.08% by October, indicating the effect of inflation on the housing market.
Despite expectations for a reversal in 2023, mortgage rates continued to fluctuate within the 6% to 7% range throughout the year. In September, rates reached just above 7%, and by November, they had escalated to the mid-7% range, marking the highest rates recorded since the year 2000.
But, as of now, the 30-year mortgage rates have started to descend since mid-November, aligning with the fluctuations that have taken place during the past year. Therefore, although they remain high compared to a few years ago, improved economic data and signs of cooling inflation have caused rates to fall, leading to a decrease in 30-year fixed mortgage rates and consequently increasing home loan applications.
Recent changes in housing prices
Mortgage rates affect how much consumers pay to borrow money in order to purchase a home. Consequently, low interest rates tend to increase demand for real estate, which helps appreciate the house itself. High interest rates do normally act in the opposite effect.
As mortgage rates were rising during 2022 due to inflation, the House Price Index (HPI) indicated a reduction in home prices over the year. The median home prices in January and December 2022 provide evidence of these shifts. The average cost of a home was $405,000 in the second quarter of 2022 but declined to $375,000 in the fourth quarter.
With still high mortgage rates in 2023, the prices maintained their negative tendency, with a median price of $373,0008 in the first quarter of 2023, slightly below the previously mentioned value at the end of 2022. However, it should be noted that mortgage rates have begun to decline in November, which can be connected to the recent rise in house prices. With mortgage rates lower, it is now more appealing for consumers to purchase a home.
