Deja Vu: Biden’s America Reliving 2008
(LibertySociety.com) – On June 15, the Mortgage Brokers Association (MBA) released a report stating that mortgage rates on 30-year fixed loans jumped to 5.78%, their highest level since 2008. MBA Associate Vice President of Economic Industry and Forecasting, Joel Kan, said mortgage applications increased despite the jump, but home refinancing efforts were 70% below last year’s levels. The increase may have those who remember what happened in the housing market in 2008 a bit concerned about their property values.
Although banks offer many different types of mortgages across the country with their own associated interest rates, the most sought-after home loan is a fixed-rate mortgage. With this type, the interest rate on the loan will stay the same over the life of the obligation, typically 15 or 30 years. The payment consistency makes these loans an attractive choice for borrowers who don’t want the uncertainty of their rates being affected by the ups and downs of the market.
Why Are Rates Going Up?
Although mortgage rates hovered around 2% to 3% for 2020 and 2021 as the government did all it could to stimulate the flailing economy during the COVID-19 pandemic, high inflation rates have since pushed the Fed to take drastic measures. Recently, the Bureau of Labor Statistics (BLS) reported inflation rates for May at a whopping 8.6%, signaling to the Federal Reserve that they needed to make moves to bring that number down.
Since mortgage rates follow Treasury yields, which increased in response to inflation, the Fed may need to quicken the pace of interest rate hikes, according to Kan. The Fed most recently raised short-term interest rates by .75%, the largest jump since 1994. Essentially, the government is making it more expensive to borrow money, bringing down demand, and, hopefully, prices.
2022 vs. 2008
In 2006, banks liberally lent out subprime mortgages to borrowers who ultimately couldn’t continue to make payments on their homes. This failure led to the housing bubble crash in 2008 and subsequent stock market crash and recession. Mortgage rates for 30-year fixed loans that year were around 6.03%. This year isn’t exactly like 2008, though, as banks are being more stringent than they were in the past in regards to lending practices.
In 2022, supply and demand issues coupled with low interest rates during the pandemic led to home prices skyrocketing. With inflation continuing to climb, many analysts believe a recession is on the horizon. In fact, if the Fed overcorrects with regard to interest rates, Portfolio Manager at Janus Henderson Investors, Jason England, stated the US “could slip into recession,” proving it’s a delicate balance.
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