Mortgage rates rise after FOMC meeting

First American Chief Economist, Mark Fleming, joins Yahoo Finance to discuss what’s next for the housing market and how mortgage rates shooting higher are just one of the ramifications after Fed Chairman Powell’s comments.

Video Transcript

MYLES UDLAND: Welcome back to Yahoo Finance Live on this Friday morning. The main story this past week was what happened with the Federal Reserve's announcement on Wednesday. And, of course, that move created a lot of ripples in the bond market. And where we have changes in the bond market, we have changes in the mortgage market and then in the housing market.

Joining us now to talk about all of the downstream impacts that we've seen so far in the last couple of days from the Fed's announcement is Mark Fleming. He's the Chief Economist over at First American. o Mark, let's just start with what we've seen in 30-Year rates really over the last couple of months. Because we saw a big move in Treasury yields at the beginning of 2021 after those record lows hit at the end of last year.

Where were things standing ahead of this announcement, and what have we seen in the last few days?

MARK FLEMING: Well, you're absolutely right. We saw mortgage rates sort of sitting at the 2 and 3/4 or sub 3% range earlier this year. The rise in Treasury yields obviously pushed mortgage rates up to a little bit above 3%. But even with announcements about the risks of inflation, transitory inflation, the bond market didn't really respond very much to the FOMC announcements earlier this week.

And mortgage rates still sit at what would be by arguably any standard historic lows even in the low 3s.

JULIE HYMAN: And so Mark, how are mortgage rates even factoring into the decisions that people are making right now? I mean, we've been talking a lot about housing dynamics, more supply and demand dynamics, more is lumber hard to get or expensive, et cetera. And we've been talking a lot less about the mortgage side of the equation. Because it has been so low. So how are you thinking about it?

MARK FLEMING: Well, the low mortgage rates basically drive what we refer to as house buying power, you know, how much home can you afford to buy. Well, a mortgage rate of 3% to 3 and 1/2 percent means you can buy an awful lot of home. Just for context, prior to the global financial crisis, mortgage rates were 4 and 1/2, 5 and 1/2, 6%. So we have such a strong amount of house buying driven demand at the moment because of those low mortgage rates.

But the interesting thing is those same low mortgage rates actually also influence supply. Because the majority of homes brought to market for sale are brought by existing homeowners. And those existing homeowners are taking advantage of the low rates and locking in historically low refinanced mortgages, which discourages them from bringing the market to supply. So you get a supply restriction and a demand boost, that ends up in fast rising house prices.

MYLES UDLAND: Yeah and, obviously, it's very easy in the media to talk about fast rising home prices, not only because the data is, again, very easy to discern. But everybody who watches our program and reads our articles has some take on the housing market. But the affordability side that you outlined there I think is an interesting dynamic as well, how much more affordable a home that's $500,000 is at 3% versus 4% and so on.

And I'm just curious, as you sit here and think about the future of the rates market, future of the economic cycle, is there even a world where the 30-Year is back at 5% or 6%? Or have we created this dynamic where the housing market needs things at 2 and 3/4, 3 and 1/4 for this cycle to keep going and the dynamism to kind of remain there?

MARK FLEMING: Well, it's actually interesting. If you think about it, we've had mortgage rates in this very low range for about a decade now. So we've been stimulating house buying power and demand for a very long time since the global financial crisis. And I think you're absolutely right. We've sort of gotten used to it. We've set our expectations around it. That said, people will still buy homes. It's not purely a financial decision to sell or to buy. There's lots of other things that go into those decisions.

We do expect, ultimately, interest rates are going to go up and mortgage rates will go up with it. But that doesn't mean that the housing market can't continue. It does mean likely that house price appreciation will cool. But that's a good thing. Because you know 16%, 17%, in some markets over 20%, annualized house price appreciation is obviously not indefinitely sustainable.

BRIAN SOZZI: What's the impact, do you think, to the lower end of the housing market, as lower income households no longer are receiving those extra unemployment checks?

MARK FLEMING: That's an excellent question. And this is really where the affordability question begins to bind, right, is that, as rates go up, then that entry level buyer who's sort of looking for that first-time home is more likely to sort of get forced out of the market by more expensive rates. And so we see it most there. That's also one of the segments of the market with the least supply. So that's, to your point, really where affordability is a challenge.

And as things continue, it's the lower end and the lower income individuals who are more likely to be prevented from accessing home ownership.

MYLES UDLAND: All right, Mark Fleming, Chief Economist at First American. Mark, really appreciate the time talking about housing market with us this morning. I know we'll be in touch and talk soon.

MARK FLEMING: Thank you.