John Higgins

NMLS #136061

Market Update February 21








A Look Into the Markets  







Interest rates ticked up to their highest level in over two years but were able to finish the week off of the highest levels. Could rates have peaked? Let's discuss why this may be so and look ahead to next week.

"There's gonna have to be a different man, Time may change me" - Changes by David Bowie

1.) Financial Conditions Have Already Tightened

Part of the Fed's mandate is to maintain price stability (inflation). The Fed helps lower inflation by raising the Fed Funds Rate, which tightens monetary conditions and slows economic demand. If demand slows, prices come down.

Even though the next Fed Meeting is still one month away, and the Fed has not hiked rates since 2018, financial conditions have already tightened. The hawkish rhetoric and threats of multiple rate hikes have pushed up rates over the past 2 months to the highest levels in years. This has already had an impact on housing.

Of course, refinance mortgage activity is down sharply and that is to be expected with 30-yr rates up nearly 1% this year.

Now we are seeing an impact on new home sales. When you combine the lumber inflation, additional supply chain-related costs, and the recent uptick in rates, the National Association of Homebuilders reports that nearly 7 out of 10 borrowers can't afford a new median-priced home. This is an unsustainable trend. Either rates must come down a little to provide relief or home prices must come down or a combination of both.

Last Summer, in front of Congress, Fed Chair Jerome Powell was heavily criticized for creating "froth" in the housing market by purchasing mortgage-backed securities every month. What we don't know is how much "froth" the Fed wants to remove from the housing market. It's hard to imagine the Fed tightening conditions and allowing mortgage rates to increase so much that housing sees a sharp slowdown.

2.) Things Are Not All That Peachy

In addition to the inflation problem, the economy is decelerating. Economic growth is slowing. The consumer is assuming more credit card debt to pay for items and fuel costs are soaring. This is a very difficult environment for the Fed to hike rates aggressively.

Moreover, consumer sentiment and small business sentiment are down sharply with the former at 11-year lows. In this environment with high inflation and low consumer sentiment, the Fed may try to be more patient with a hike rate and wait before approaching. Seeing the 10-yr Note yield decline beneath 2.00% suggests the bond market is not worried about runaway inflation but may be looking at the notion of slower economic times ahead.

3.) Russia/Ukraine Remains Unresolved

Uncertainty around Russia and Ukraine continues. When uncertain geopolitical events take center stage, the investment community adopts a risk-off trade and buys US-denominated assets like the US Dollar, Treasuries, and even MBS.

There is a fear Russia will indeed invade Ukraine and this will send the price of oil above $100 quickly. High oil prices are a killer. It's a tax on consumers that goes uncollected. Should the Russia/Ukraine story escalate, and oil prices head higher, the Fed will have to soften its tone and be more dovish or accommodative. The opposite is true – if Russia/Ukraine comes to a political resolution, we could easily see rates pop back higher as the uncertainty is lifted. The longer this story lingers the less likely the Fed can be hawkish and hike rates.

Bottom line: The uncertainty and slowing in some sectors of our economy is giving interest rates some relief. This story could change quickly, and rates could easily creep back up and strike new multi-year highs. If you are considering a mortgage, now is a great time amidst the uncertainty and modest rate relief.

Looking Ahead

The headline risk continues. Next week brings the Fed's favored gauge of consumer inflation, the Core Personal Consumption Expenditure (PCE) Index. The markets are currently expecting a 4.8% year-over-year reading, down slightly from last month's 4.9% reading. If inflation shows moderation, the Fed could back away from its hawkish tone and possibly not hike rates as much. The opposite is true. Michigan Consumer Sentiment will also be released and if this report doesn't start showing increased confidence in consumers, the Fed will be in a tough spot to hike rates many times.





Mortgage Market Guide Candlestick Chart  







Mortgage Market Guide Candlestick Chart

Mortgage-backed security (MBS) prices are what determine home loan rates. The chart below is a 1-yr view of the Fannie Mae 30-year 3.0% coupon, where currently closed loans are being packaged. As prices go higher, rates move lower and vice versa.

MBS prices have declined over the past two months, causing rates to touch levels last seen in late 2019. In the next few weeks, we should expect home loan rates to remain elevated as we approach next month's Fed Meeting and February PCE.

Chart: Fannie Mae 30-Year 3.0% Coupon (Friday, February 18, 2022)








Economic Calendar for the Week of February 21 - 25








The material contained in this newsletter has been prepared by an independent third-party provider. The content is provided for use by real estate, financial services and other professionals only and is not intended for consumer distribution. The material provided is for informational and educational purposes only and should not be construed as investment and/or mortgage advice. Although the material is deemed to be accurate and reliable, there is no guarantee it is without errors.


As your mortgage professional, I am sending you the MMG WEEKLY because I am committed to keeping you updated on the economic events that impact interest rates and how they may affect you.


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John Higgins

NMLS #136061


Mortgage 1, Inc.


43456 Mound Road
Sterling Heights, MI 48314

Mobile: 248.895.7272



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