Indiana Real Estate & Mortgage Rate Market Forecast for 2022 and Recap of 2021

NMLS number 33041 requirements NMLS number 664589, an equal housing lender. Some restrictions apply. Happy 2022! - I remember early January 2021, and then, in a blink of the eye, it's the middle of summer, a blink of the eye again and you're already in 2022. I'm sure that most of you feel the same way. It is absolutely amazing to me how fast time goes. Of course, the older I get, I guess the faster it goes. But who knows? It does seem like it's going by very fast. And always at this time of year, everybody's looking at the market. We keep hearing about the market: you hear about the housing market, you hear about the rates. So I thought today would be a good day to talk about the market forecast- what we're foreseeing for 2022. And as we do that, I want to go back a little bit and look at what happened in 2021. Because 2021 was a very good year. The interest rates I had forecasted, I expected the rates to begin to rise in the beginning of the year and then recover into the fall. That's very much what we saw. We saw that the rates did increase a little bit in the very start of the year of 2021. And then, as we got into the year, it started to come down. It came down a little sooner than I anticipated. I thought it would come down in the fall, and into the winter. It actually came down probably late spring, early, early summer. And they didn't go up that much. But they did go up, then they came back down. And so it was just one of those things, as you look at the market, what's going to happen, forecasting is always a difficult thing. I have some people that I listened to. And I listened to what they have to say and why they're saying it, and hopefully I can put something together that gives some reasonable expectation of what actually is going to happen. And so, that is what happened with interest rates. As we ended the year, at the very tail end of the year, the interest rates started to rise again. And they started to rise due to the inflation numbers that were coming in. The Fed said the inflation was transitory, meaning that it was going away. And we kept saying it's not transitory, it's not going away. If you look at what's going to happen, at the time when they measured inflation, it's a year, or over year, out. So when you get your January numbers for 2022, your January numbers for 2021 go away. Well, what happened was as you got late in the year, you could look, I think it was August and September, inflation numbers were zero. Now, we knew inflation was going to be higher than zero in 2021. When those numbers fell off, you could tell. We all know that gas has gone up, groceries have gone, everything's gone up. I mean, that's pretty much what's happened. We're told it's hard to get products, it's hard to get them shipped, and everything has gone up. So with that increase, we saw the interest rates then starting to creep up. Then the Feds late in the year, I believe it was early December, it could have been the middle of November, came out and said that they believe it was no longer transitory, the inflation, and they were going to start doing tapering. I think it was early September or November actually. And they started tapering. Tapering means that they were buying, at the time they were buying about $120 billion a month in mortgage backed securities. And when they decided to taper they were going to start cutting back how new treasuries or new mortgage backed securities they were going to buy. And they said that was going to run through the middle of 2022. Now they've shortened that time. And now they're saying that they're going to end that in May or March of 2022. That's actually a good thing. That should help out. We'll talk about that in a little bit, how it works with inflation. So let's go on to the housing market. What do we see in the housing market? Interest rates, we see them going up for the first part of the year in 2022, then we think they're going to come back down. And we think that we'll be somewhere on a 30 year fixed, just somewhere in that 3% or so range. It is a forecast. Nobody knows for sure, but that's what we feel we should be at. So on to the housing market. What happened last year, the recap. Obviously we had strong demand, very tight supply, and we forecasted that would push housing prices up by high single digit percentages. And then, what actually happened, there was strong demand and tight supply. But COVID caused supply chain disruption and labor shortages, which pushed real estate values even higher than our robust forecast. So there are a lot of people not forecasting those high single digit percentages of increase. And it looks like, it depends on where you are, but in our market around 14% is what they said our market did in housing, in appreciation. And I can tell you, that's what we're seeing in appraisals. Sometimes it takes a little bit of time for those appraisals to catch up. We need some houses to close at the higher dollar amounts, before we can get the appraisals to catch up. We're starting to see that, or we have seen that in some areas. You have to understand, not every area does it at the same pace. Not every area happens at the same time. So it's one of those things where, as we look at it, we just look at what's going on, or we look at what's happened when you look back, but we have seen it happening. We do believe that we were short on our expectation of what houses would increase by. We were thinking single digits, 8 to 9.5%, and they really increase somewhere between 14 and 18%. So houses increased in value, very significantly. That's a very good market. And 2022- let's talk about the dynamics of the market in 2022. The feds, as they did last year, will play a major role in 2022. They're going to taper, which they've already started. We said that they're going to end that in in March. And then we expect them to start raising what's called the federal fund rate in May. And they're saying they are going to have three increases in the federal fund rate in 2022. That's their projection. So that's going to be interesting. Normally, at least recently, most of those increases have been at .25. And you have to understand the federal funds rate now is 0 to .25. Depends on how you look at it. And so, as they raise that, if they raise it by .25, it will go from basically let's say .25 to 1% this year. Now, that's the federal funds rate, the federal funds rate is 3%, below prime. So if it raises to one prime will raise to four; right now it's at three and a quarter. If that happens, loans that are based on Prime, like home equity lines of credit, credit cards, things like that, they will probably go up because they're based more on those rates and those are short term rates. The actual mortgage rates, what we have seen, many times as they go down, and we're going to talk about that here in a little bit, along with these rate hikes, the Feds want to clear their balance sheet. So they want to clear it off, and it's an amazing amount of like $8 trillion they have on their balance sheet. They want to clear off the mortgage backed securities, not so much the 10 year treasuries, the mortgage backs are more important to clear off, so that's what they'll probably be looking to do. And they're gonna get rid of that. All of that can have a huge impact on interest rates, the equity markets. It can impact housing, as well as jobs. When that happens, it creates a slowdown in the economy, it tends to lower interest rates, but it does slow the economy down. So that's why we're expecting rates later in the year to come down for 2022. Now, the other part is when the feds do things, the feds have voting members and those voting members rotate each year. The New York Fed is never off, but most of the others, they they come on, they go off, they come on, they go off voting rotation. That's it, there's a rotation in that. And that's for the voting members; they are all there, but not everybody votes. So in 2022, the composition of the Fed members that are voting look to be less accommodative than in 2021, so they are likely to do more to stop inflation or to start cutting that back than what they were in 2021 because there are many different members. And fighting inflation is going to be the main focus. They've kind of shown us that, the negative stock market reaction could cause feds to lose the resolve of fighting inflation. They don't like it when it hurts the stock market, but it is going to hurt the stock market if they do this, but it's going to help mortgage rates. And it's going to hurt the economy short term, but long term it's what we need to stem the inflation. Inflation can be a major problem for us as a country. So we need to stop that as much as we can. The fed, in my opinion as I said before, they should have hiked sooner, they should have stopped buying so many mortgage backed securities. And the reason they didn't is they mistakenly thought that inflation was transitory. And we talked about that, we didn't believe it was, and they did. So now in fact, they've come out and said it's not transitory anymore. So that's where we're sitting. And history can help us forecast how the Feds action in 2022 will influence the markets. So after the break, we're going to talk about history, we're going to look back at times like what we're having today -not exactly the same but much like what we're having today- and see what the Feds did and see what it caused in the economy, and what it caused for mortgage rates in the housing market. Welcome back, and thank you so much for joining me, this is Rick Ripma, your hard working mortgage guy. If you have any questions on mortgage, or want to talk to me, you can go to my website, hardworkingmortgageguy.com. hardworkingmortgageguy.com and I'll get back with you on the website. You can contact me there, you can look up all my contact information, and get some basic information about me. And it can be an easy way for me to get back with you. I'll do the best I can to get back to you in a timely fashion. And again I appreciate that. We've already talked about/ recapped 2021, what interest rates did, what the housing market did. We've looked at the dynamics of 2022 and what we think is going to happen, and we want to move on to the history. This is what the Federal Reserve did when the market has been in a same or similar situation to what we have today. Back in the 1970s, Arthur Burns was the Fed chair. And he was a pretty stern guy and he ignored the inflation, which was rising rapidly. Anybody who was around for that, I was around for that, I was in my teens, but I was still around for it. And they ignored inflation, which was rising rapidly. They insisted, the Feds insisted, that inflation would be transitory. And that does sound kind of familiar. It sounds like exactly what our Feds did for most of 2021. So what happened in the 1970s? Year over year, inflation ballooned from 7% in 1978 to 14%, by the time he left office in 1980. So it doubled from 7% to 14%. We're looking right now at, I think it's basically 6%, we're right at 6% inflation. We were really low at near under 2%. The Fed said they want to keep it at two but they wanted to average two and and now we're at six, and they want to get it back down. So even though back then Burns remained steadfast that inflation was transitory; he never changed that. That was what happened. What did that do to mortgage rates? Higher That's inflation caused mortgage rates to rise from 12% to 18%. So rates went, back then, from 12% to 18%. Now, we know our rates are considerably lower than that today, but they are on the rise. I'm not saying they're going to go to 12 to 18%. But we do think they're going to go up. And right now they're in the low threes, mid threes, probably mid threes, now with with what's happened in the last few days. And we think they're going to run into the upper threes, maybe as high as four, maybe a little higher, but right in there before they start coming back down. That is a big cause of inflation. Now in 1980, Paul Volcker becomes the Fed chair and he fights inflation. I mean, he is a tough cookie. And he hiked the federal funds rate. Now remember, our federal funds rate right now is .25. At that time, it was 11%. And he hiked it to 20% in two years. So it went from 11% to 20% in two years. Now, by doing that, by raising it that much, inflation dropped from 14% to below 5%. So he did it, it absolutely works. We'll talk about it, more more people have done the same thing. History shows that it works, hiking the federal funds rate will lower the inflation and it also will drop mortgage rates. And because the inflation dropped from 14% to 5%, mortgage rates sharply declined from 18% back to 12%. Again, significantly higher than we are today. But that's a huge drop, that's 6%. We couldn't drop 6% in interest rates today, from where we are today; we'd be negative something and that's not gonna happen. But what were the consequences of this happening? What were the consequences of being so strong on raising that federal fund rate to fight inflation? Well, the S&P 500 sharply declined by 30% during this time, so the market dropped by 30%. And tighter monetary policy pushed the US into a recession in 1982. So by doing that, by raising the federal fund rate, stifling the inflation getting it to come back down, mortgage rates came down, the stock market came down, and the US went into a recession in 1982. Now let's look at another another tim. We had Alan Greenspan, and this is in the late 90s. Inflation doubled in the late 90s, from 1.75 to 3.5%. And that higher inflation caused mortgage rates to rise from 7%, to 8.5%. Still, you know, compared to what we had back in the early 80s, that was great, but still much higher than what they want. So inflation went up, and interest rates went up. Unlike Burns, though, Greenspan took action in mid 1990s. He didn't let it get out of hand; he hiked the federal fund rate, by 1.75, matching the rise in inflation. And took the federal funds rate from 4.75 at the time to 6.5%. So it was at 4.75; so let's look at this-- inflation doubled, it was at 1.75, it went to 3.5. The mortgage rates went from from 7% to 8.5% back then, and they raised the federal fund rate from 4.75 to 6.5%. What happened when they did that? Inflation responded and dropped from the 3.5%, and nearly got the to 1%. So it dropped significantly. Mortgage rates dropped from 8.5%. And remember, they wen7 to 8.5% , they dropped from 8.5% to 5.5%, sparking a huge refi boom, of course it dropped 3% and drop 1.5% over more than what they had been a year or two earlier. Also..... consequences. Again, the S&P fell, this time by 50%, from the spring to the fall of 2000. So from the spring to the fall of 2000, stocks dropped 50% and the US entered a recession in 2021. So what happens? What are we seeing as a consistency? Inflation starts to go up, the Feds raise the federal fund and mortgage rates go up the Feds raise the federal fund rate. And when they raise the federal fund rate, inflation comes down, and mortgage rates come down. The S&P falls by significant amounts; one time 30%, this time 50%. And the US enters a recession right after this. So where are we today? So today we're under Jerome Powell. In 2021, inflation increased from 1.75% to 7%. I said 6, it was 7, I apologize. And Powell thought inflation was transitory. Higher inflation caused mortgage rates to rise, you know, right in the mid 2's, in to the mid 3's. The Fed wants to hike and reduce purchases at the same time. So they aren't going to hike interest rates, the federal funds rate and reduce purchases at the same time. So they're going to get through the reducing their purchases before the hike. And that's why we think nothing's going to happen until after they stop reducing purchases; that'll end in March. And then we think in May is when they'll start increasing the federal fund rate, could be earlier than that but that's what we're expecting. And like I said they're done with tapering in March. So the Fed is targeting three rate hikes in 2022 and two to three more in 2023. Again, normally those order point increases .25. We have seen it higher than that but we expect interest rates and inflation to continue to rise. If the feds can tame inflation, mortgage rates should drop. But maybe maybe from higher levels, it's going to be from higher levels. That would be my my expectations. So as a recap of what happened in the past, Burns, Volcker, inflation went from 7 to 14, mortgage rates went from 12 to 18, federal fund rate went from 11 to 20. Inflation, once they did the response, inflation dropped from 14 to 5, mortgage rates responded, and they dropped from 18 to 12. And the consequences was the S&P was down 30. And there was a recession. With Greenspan back in the late 90s, early 2000s, inflation went from 2 to 3.5, mortgage rates went from 7 to 8.5, federal funds rate went from 4.75 to 6.5. And the response from inflation, once they did the federal funds rate, it went from8.5 to 1. Mortgage rates responded by dropping from 8.5 to 5.5. And the S&P was down 50%. And we went into a recession. So what are we expecting right now, and what we've seen so far, inflation has gone from 2% to 7% under Jerome Powell in 2021, and into 2022, mortgage rates have gone from the mid 2's to the mid 3's, the federal fund rate is at zero, we expect it to go to 1% in 2022. What do we expect that to do? So what are we expecting to happen? We think that should drop, right? That's what it did the last two times. It should drop inflation. Mortgage rates should also decline, as inflation declines. And the consequences are that we would expect the stock market to drop. And we would expect the economy to slow like it did the last two times and we would expect to go into a recession. Normally when we get a recession, we do get lower mortgage rates. The wildcards though, we do have some wildcards here that could change things. Number one COVID plays a major influence on monetary policy and supply chains. Major surprise, and COVID could change the outlook dramatically. We know that COVID has become very, very political and political can change a lot of that. Additional stimulus may fan flames of inflation. So if they if they want to do more stimulus, if they want to pass bills and spend money in Congress and the Senate and the President wants to pass them and they send all this money out, that would push stock prices temporarily higher, that does temporarily cause mortgage rates to rise further, and would make the Feds job of controlling inflation more difficult. So if they pass new stimuluses, then it could counteract what the feds are signaling they're going to do. Run off of the Fed balance sheet first, the first step is the Fed to stop purchasing new bonds and treasuries. The next step will be that they're going to hike the federal funds rate. So by March, they're going to do the first step. We think by May they're going to start the second step. Feds are still buying $70 billion a month. Remember, they're buying 120, they're not buying 100. There's 70 billion in mortgage bonds, through what's called reinvestment, which keeps rates low. All they're stopping is the new bonds. Right now, they're not saying they're gonna stop the reinvestment. So they still should be buying about 70 billion a month. And when the Fed stop reinvesting to that 70 billion, mortgage rates could move higher than previously thought. But right now, they're not signaling when they might do that. And they aren't going to do it all at one time. That would just be a real shock to the economy. So the stock market we're expecting to move lower. With all of this, the forecast: I would expect it to decline somewhere in the 10% range in the major indices in 2022, based on what we think is going to happen. Right now stocks are expensive, and price to earnings multiples are extremely high. Rate hikes could cause the peony multiple contraction resulting in lower stock prices as seen in the past. The interest rate forecast: we anticipate mortgage rates to rise along with inflation during the first part of the year towards 4%, net range. With that action, a softer stock market and slower economic conditions, interest rates should head lower in the second part of the year, we think towards the 3% range. So we're forecasting rates to rise somewhere in the upper threes to four in the first half of the year then declined towards the 3% range and the second half of the years the Feds hike rates strategically. What we want to do is just make sure if you're doing something now buying a house something like that we want to look at the lowest cost we can get, maybe have a little higher rate and then refinance when rates come back down. The housing forecast: it's still a tight labor market. Rents are still increasing and don't look like they're going to stop. There're over 5%, the demand maybe slightly softer, you know, as interest rates rise, but it's still robust, everything's indicating that we are going to have a very good housing market. Hopefully that gives you an idea of what we expect to happen in 2022. If you have any questions or would like to talk about it, or you're looking at financing a home, either a new purchase or a refinance, please give me a call. The best way is to go online at hardworkingmortgageguy.com You can call me from there, you'll find my phone numbers, and it has all of my email addresses as well. If you want to get a hold of me and have any questions, if you want to talk about anything, that would be great; hardworkingmortgageguy.com Thank you so much for joining me today. I really appreciate it. And next Saturday, we're going to talk about in this market, with what we're talking about, how do you refinance your house and what reasons would you go about refinancing. Have a great weekend.