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Mortgage rates: The Fed gave home buyers ‘no solace or hope,’ economist says

First American Chief Economist Mark Fleming joins Yahoo Finance Live to discuss the outlook for mortgage rates and whether first-time home buyers should go for a 30-year fixed-rate mortgage or an alternative.

Video Transcript

[AUDIO LOGO]

- Joining us now for a look at the personal finance around housing, Mark Fleming, First American Chief Economist, joins us now. Mark, great to have you on the program. We were just talking with Danny about how a lot of these first-time home buyers who are, many in cases, indebted, could have an opportunity here. But look, at the end of the day, it is still broadly a hot housing market, even despite the ramp-up we've seen in mortgage rates, right?

MARK FLEMING: That's right. I mean, we still have a supply problem that you mentioned. One of the reasons why rental rates are growing so quickly is because there's an overall lack of housing out there. So adding more demand, it's good, but it's also going to run into the problem of supply. It certainly helps, as Danny mentioned, this increase in home-buying power is helping to offset the loss in home-buying power that we've seen because mortgage rates have risen. And the Fed gave us no solace or hope that was going to end any time soon.

AKIKO FUJITA: So what does the broader demand picture look like? I mean, we keep hearing about a pullback in applications, and yet there are those who are in the market who are saying, look, even with that, I have saved enough money up to be able to purchase a home. I mean, what's the calculation that's happening?

MARK FLEMING: I suppose it's all relative. When we look at mortgage applications that were released this week, refinances are down 83%. I mean, that's clearly a direct impact of rising mortgage rates. Everybody's got low rates now, why would you refinance? The purchase market, on the other hand, yes, it's down over 20% in terms of applications relative to last year. But last year was the best year we'd ever had.

So in relative terms, it's back to where we were in the middle of the last decade. Less than in recent years, but certainly not no homes. And that goes to your point, there's still a lot of potential first-time home buyer demand out there.

- Mark, there are a lot of factors that go into what the pricing is on a 30-year fixed mortgage rate. But at the same time, we did see some declines after June. Now, that's reversed, as of the numbers that we even got this morning, kind of essentially back up to where it was. Where do you see mortgage rates going from here, knowing that the Fed is going to continue to hike, but maybe not all that far if the economy really, really starts to slow down?

MARK FLEMING: I think we've seen over the last few months that mortgage rates generally get well ahead of the Fed. And so what we're seeing in terms of 30-year fixed rate mortgages closer to 6% is almost assuming that the Fed will sort of keep the pressure on, at least raise rates a little bit more in the coming meeting in September, likely keep rates high into next year, as they're indicating they will do.

So we're sort of baking in, if you will, the expectation of what the Fed will do over the next six to nine months. At a mortgage rate, 30-year fixed mortgage rate of almost 6%-- in Danny's segment, you popped up a chart that showed that the hybrid ARMs, these Adjustable Rate Mortgages, are a full percentage point or more below.

And so shifting to an adjustable rate mortgage is actually a good way to sort of regain some of that buying power lost, in addition to the benefit you might get from the loan forgiveness, all to help keep you in the market and be able to afford to buy a home. And one must remember, I know first-time home buyers often think that this is going to be there forever home, but data suggests that the first is never actually your forever. So why pay the expense of locking in a 30-year fixed rate mortgage?

AKIKO FUJITA: So that's interesting. Because it comes down to this question of those who are still looking to buy, you say, number one, well, put the inventory aside. If we're looking at specifically the monthly payment, what is the better option right now? It sounds like you're saying go for the ARM because the 30-year fixed is just not at a good rate right now.

MARK FLEMING: So I'm an economist, and I'm supposed to act rationally, but when I bought my first home, I did a 30-year fixed rate mortgage. That's actually the irrational thing to do. Yes, the rational thing is to go for that 5, 7, or 10-year ARM because the data suggests that most first-time home buyers don't stay in that first home for more than five to seven years.

Meaning, you're going to be in the mortgage market at whatever the prevailing rates are when you buy that second home or move up into a new home. So you're paying for something that you really don't ever utilize. Getting that hybrid ARM gives you basically a boost of 1% less of a rate and a few thousand dollars, at least, of buying power.