Market Update 10/20/23

The 8% Mortgage

Today the 30-year mortgage rate hit 8%, the highest level in 23 years! Just two years ago, the 30-year mortgage was 3%, which means a borrower with a $400,000 mortgage today is paying $12,000 more per year today than just 24 months ago. Conventional wisdom would indicate that the housing market would be in free fall with this spike in rates; however, many areas of the country are at peak prices. Because the rate spike has been so rapid, homeowners who borrowed before 2022 are simply staying in their homes and enjoying their low mortgage. This lack of inventory has kept prices elevated, but with rates crossing 8%, caution is prudent.

In the next 36 months there will be a wave of both commercial and residential notes that were underwritten in 2020 or prior that will reset as they had initial terms of five to seven years. If rates remain elevated those interest payments will double and borrowers will cringe. This is the exact scenario that played out in 2006 as mortgage rates doubled from a few years prior. By 2008 real estate was in free fall and the great financial crisis leveled the market. From my conversations with savvy real estate professionals, underwater office properties are being given back to the bank, but those properties may not be getting written down on the bank books. This Hall of Mirrors game is unsustainable, and cracks are emerging. To clear the real estate market either prices must drop, or rates must fall. My 25 years of investment experience tells me to expect the former before the latter.

As always, I appreciate your continued trust and confidence.