Interest Rates Impacted by Treasury Yields

It looks like the national picture for housing stats has not improved in recent months; according to the National Association of Realtors, there were 1.13 million homes for sale at the end of September, which is down more than 8% from a year ago when it already hit a downward spiral. As a result, existing home sales dropped to the slowest pace since October 2010 nationally. That was during the Great Recession when the market was in the midst of a foreclosure crisis. Lawrence Yun, the National Association of Realtors Chief Economist, commented, “As has been the case throughout this year, limited inventory and low housing affordability continue to hamper home sales.” The association commented that first-time buyers made up just 27% of sales. Historically, they make up about 40%. It’s no wonder that mortgage demand is now at the lowest levels since 1995, according to the Mortgage Bankers Association. 

When I turned on the TV Tuesday morning and saw the US 10-year Treasury yield at 4.942%, it raised concerns. This benchmark security is now on the cusp of 5%, which we haven’t seen since 2009, just before the worst of the financial crisis hit. We all know the Fed’s goal is to get inflation back to their 2% target; they want to keep financial conditions tight so that inflation comes down. 

The high Treasury yields are great for fixed-income investors. I picked up a yield on a 1-year Treasury at 5.5% yesterday, and that’s great for savers; however, it does the opposite for those looking to lock in a 30-year fixed-rate mortgage to finance a home. The Dow Jones industrials dropped more than 300 points the same day because of the increase in Treasury yields on the 10-year. So, what did this increase in the 10-year yield do for mortgage interest rates? The 30-year fixed rate mortgage rate just hit 8% for the first time since 2000 as the Treasury yields soared, according to Mortgage News Daily. This is the highest level since mod 2000, and it occurred because mortgage rates loosely follow the yield on the 10-year Treasury. Unfortunately, the higher interest rates have caused mortgage demand to plummet nationally as applications fell nearly 7% last week from the previous week, according to The Mortgage Banker Association. 

To give you an idea of how much interest rates affect the market here in the Lakes Region, let’s take a look: the average rate on the 30-year fixed rate mortgage was around 3% just two years ago when we had a big surge of real estate activity. Today, if you purchase a $400,000 home in the Lakes Region with a 20% down payment, you would have a monthly payment of over $1,000 more than it would have been 2 years ago. That’s a high difference to absorb and impossible for a first-time homebuyer, considering how much home prices have escalated over the past three years in the Lakes Region. The National Association of Realtors indicated that nationally, all-cash sales made up 29% of all September transactions, up from 27% in August and up from 22% in September of last year. In the Lakes Region, the all-cash percentages are even much higher because of our heavy concentration of second homes and high-priced waterfront properties, which are often all cash transactions. 

When you look at the State of New Hampshire real estate activity for September, it was similar. The number of September single-family residential sales dropped 30% compared to the prior year; however, affordability remained at historic lows. All of this occurred as the median price of those sales hit an all-time high of $490,000. You can see why the New Hampshire affordability index was 59 for the second consecutive month, equaling the lowest point in the New Hampshire Association of Realtors recorded history. Not good news. At least the monthly supply of inventory went up slightly, increasing 11%, representing a 2-month supply of inventory. Looking ahead, Federal Reserve members signaled at their September meeting that interest rates could stay higher for longer, adjusting policy rates a half point higher for the end of 2024 and 2025 in their latest projections. So, it looks like mortgage rates will remain elevated through the end of the year. Let’s hope that as the winter months approach, we don’t enter a deep freeze due to popping home prices and high interest rates in the Lakes Region. 

So, one thing is clear today in the Lakes Region: increased housing inventory and better interest rates are essential to revive the housing market. We are starting to see more inventory gradually coming on, and that’s a good start. We need to see inventories of homes for sale turn considerably higher. This additional inventory, in turn, would ease the upward pressure on house prices and help settle back to more normal pricing levels. At the same time, we have to watch the Federal Reserve policymakers. What matters most is how long they plan to keep interest rates elevated and when they begin implementing interest rate cuts. It’s a tough balancing act, especially with the new war in the Middle East accelerating. At some point, the scale will move in the opposite direction, and the rates will move downward, letting the sunshine in.