Uncertainty is in the air at the moment. And uncertainty over time will hurt the housing market and, in turn, the mortgage industry. No one is going to buy a home if they’re worried about having a job next month.
Rick Sharga is a sought-after expert on all matters related to the mortgage business. The founder and CEO of CJ Patrick Company, which provides market intelligence for the industry, labels affordability as a clear concern for homebuyers, but said some concerns are more psychological than realistic at this time.
Sharga spoke to Scotsman Guide about the economic climate. He shared what he felt was worrying, what may be overblown and where he thinks interest rates for a 30-year fixed-rate mortgage will land this year.
What is your biggest concern for the economy in this environment?
Whether we’re going to be able to get our national debt under control. With a $36 trillion national debt, our debt payments are now the third-largest item in the federal budget, even above military spending. If we don’t find some way to get that deficit under control, it’s going to have huge implications for the economy going forward, and conceivably, you wind up in a situation where we default on our financial obligations.
How does that affect the housing and mortgage markets?
The fact the government has to continue to borrow money to pay debt makes borrowing more expensive for everybody else. So, in a way, it’s contributing to the higher bond yields, which ultimately makes mortgage rates higher, which makes affordability that much worse for prospective homebuyers.
The tariffs are having more of a psychological than a financial effect on the housing market at the moment. I was looking at a page on CNN that I go to for stock and bond information and they had eight stories, and all eight stories had the word tariff in the headline.
How are the tariffs affecting the housing market?
That is causing people to be concerned about the prospects of inflation, prospects of unemployment. When you have that kind of uncertainty in the market, it makes people less willing to make the kind of long-term financial commitment of buying a house.
What’s a bigger concern — too-high interest rates or a lack of inventory?
Today, it has to be interest rates. Affordability, according to the Atlanta Fed, is probably the worst it’s been in 40 years. When mortgage rates doubled back in 2022, it just knocked the foundation out from under affordability.
Inventory is up 33% year over year in a lot of markets. We’re actually seeing inventory levels higher than they were prior to the pandemic. In those markets, we’re seeing price appreciation slow down and, in some cases, even go negative. Inventory is starting to take care of itself.
What are your expectations for interest rates this year?
I’ve been among those hoping that we’d see mortgage rates get down to the low-6s by the end of the year, but bond yields aren’t cooperating. I am optimistic that we’ll still see mortgage rates for a 30-year down in the mid-6s by the end of the year, but I’m not optimistic we’ll see them get much lower.
People hoping for a refi boom wanted rates to get down to the 5s.
I don’t see it in the math anywhere. I really don’t.
Insurance and even property taxes are straining housing affordability. What can be done about that?.
The reality is the insurance issue is probably going to get worse before it gets better. Insurance companies have been hammered with multiple multibillion-dollar losses because of extreme weather events, partly because we’re seeing more severe weather, but also partly because we’ve seen a lot of building in areas that are prone to natural disasters.
Consumer sentiment is down, but stocks have been on the rebound. Is there a disconnect between Main Street and Wall Street?
Wall Street does tend to react dramatically to changes in direction, changes in policy, and we’ve seen that with the Trump administration’s sort of on-again, off-again tariffs. The media has probably not helped consumer sentiment. By focusing almost obsessively on the potential impact tariffs might have on inflation, on unemployment, we see consumer spending slowing down a little bit and ultimately, we could worry ourselves into a recession.
What could restore builder confidence at this time?
Builders have a huge number of properties under construction or not yet started. Both of those are near record highs and they’ve seen consumer interest slow down. That combined with the likelihood of costs going up for both materials and labor is probably weighing on them.
If we saw a little bit of an uptick in buying activity, maybe a couple of sustained months of better-than-expected sales figures, builders probably would feel better than the kind of gloomy outlook they’ve been showing over the last few months.