Mortgage rates have fallen after Silicon Valley Bank declared bankruptcy, causing panic in financial markets. Investors are seeking the safest assets during these uncertain times, and U.S. government bonds are considered the most secure, with guaranteed payments. However, banks must properly manage interest rate risks, or they may face a similar fate to SVB.
Mortgage investors of VA, FHA, and conforming mortgages can rest assured that they will get their money back, as these assets are government-guaranteed. As a result, the average 30-year mortgage rate has dropped from 7% to 6.5% within two days, and monthly payments on typical-size mortgages have decreased by about $100.
There may be further declines in mortgage rates. Although consumer price inflation remains stubbornly high, it is decelerating slowly, from 9% in mid-2022 to 6% in February 2023. The Federal Reserve aims to get inflation to around 2%, which may take another two years, but getting it to 3% or 4% seems likely by the end of this year. Housing costs are a significant factor in inflation, as they represent 34.4% of a typical household budget. While rental costs are still increasing at an annual rate of 8.8%, private sector apartment data shows actual rent declines, and construction of apartment units is at a 40-year high. This increase in supply may lead to more vacant units, which could significantly reduce rental costs.
The Federal Reserve must follow the advice of hockey great Wayne Gretzky and anticipate future trends, rather than reacting to current ones. Given the projected rental costs and the lagging impact of Fed actions, the Fed should stop raising interest rates.
One significant risk remains: Is the national debt making U.S. bonds less secure? The national debt is expected to reach $30 trillion, which could lead to higher borrowing costs for all, including the government, if Washington fails to act. However, a default is unlikely.
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