February 15, 2022 – Fears In Today’s Economy. Fear is an interesting phenomenon when it comes to the economy.

Economic Commentary

Fears In Today’s Economy. Fear is an interesting phenomenon when it comes to the economy. Certainly, the economy has dealt with a lot of fear in the past two years as the pandemic has raged on. With the advent of vaccines, some of this fear has waned, as more and more Americans are venturing out despite the threat of variants. If you go to a grocery store in most areas of the country, masks are a very common sight. Less fear, but not fearless.

There are additional fears we are dealing with at the present time. One was recently cited by an economist with First American Title, as they described the potential real estate market in early 2022. That fear is FOMO—the fear of missing out. With mortgage rates rising this year, it is expected that many will rush to purchase before owning becomes more expensive due to higher interest rates. It is hopeful that some sellers will also be motivated to list their homes at the same time, thus alleviating the concurrent inventory shortage.

Then there is the fear of “stagflation.” We are already dealing with surging inflation, which has caused interest rates to rise ahead of the Federal Reserve removing stimulus from the economy. Thus far, this inflation has been caused by spikes in demand, such as within the aforementioned real estate market. But what if the economic recovery slows down this year and inflation remains an issue? If this happens, you will hear the term “stagflation” bantered about more and more. We are not saying this will happen, but just another one of those fears that exists in today’s economy.

Weekly Interest Rate Overview

The Markets. Mortgage rates continued to rise in the past week, with gains accelerating at the end of the week in response to strong inflation data after the survey results were announced.  For the week ending February 10, 30-year rates rose to 3.69% from 3.55%. In addition, 15-year loans increased to 2.93% and the average for five-year ARMs also increased to 2.80%. A year ago, 30-year fixed rates averaged 2.69%, almost 1.00% lower than today. Attributed to Sam Khater, Chief Economist, Freddie Mac, “The normalization of the economy continues as mortgage rates jumped to the highest level since the emergence of the pandemic. Rate increases are expected to continue due to a strong labor market and high inflation, which likely will have an adverse impact on homebuyer demand.” Note: Rates indicated do not include fees and points and are provided for evidence of trends only. They should not be used for comparison purposes.

Real Estate News

Fear of missing out on low rates and the potential loss of house-buying power could supercharge the housing market ahead of the spring home-buying season, said First American Financial Corp., Santa Ana, Calif. The company’s monthly Real House Price Index reported real house prices increased by 1.5 percent between October and November, and by 21 percent year over year—the highest annual percentage reported by any index. The report noted real house prices are 5.6 percent less expensive than in January 2000. While unadjusted house prices are now 42.7 percent above the housing boom peak in 2006, real, house-buying power-adjusted house prices remain 33.8 percent below their 2006 housing boom peak. “While rates are expected to increase steadily throughout 2022, many potential home buyers may try to jump into the market now before rates rise further,” said First American Chief Economist Mark Fleming. “The fear of missing out, or ‘FOMO,’ on low rates and the potential loss of house-buying power may supercharge the housing market ahead of the spring home-buying season. However, housing supply tends to increase in the spring months as more sellers list their homes for sale. While home buyers may have FOMO because of rising rates, they may not want to succumb to the fear of better options, or ‘FOBO,’ because there may be a better home option or options when there’s more homes for sale, even if it means they may pay more.” Fleming said affordability is likely to decline further in 2022, because both mortgage rates and nominal house prices are expected to rise. “The Federal Reserve has signaled the end of the easy money era is near,” he said. Source: MReport

Rents are continuing to rise across the US. The cost of rent, on average, was 10.1% higher in 2021 than in 2020, growing five times faster last year than it did in the first year of the pandemic, according to Realtor.com’s Monthly Rental Report. By December, national rents had the sixth-straight month of double-digit annual increases. The national median rent for a one-bedroom in December was $1,651, up 19.3% over the year before. “With rents already at a high and expected to keep going up, rental affordability will increasingly challenge many Americans in 2022,” said Danielle Hale, Realtor.com’s chief economist. Rents tumbled during the beginning of the pandemic in 2020, but they flattened out in early 2021 and gained momentum throughout the year. Rents hit a double-digit yearly pace by summer and continued to rise through the second half of 2021, according to the report. The resurgence in rental prices was partly driven by big city renters moving to smaller rental markets where their money went farther, the report said. “Regardless of where you live, renting is generally more expensive now than in prior years,” said Hale. “Those able to work big city jobs while living in secondary metros are still likely to find more affordable rental options than in the biggest tech cities. For those thinking about making the transition from renting to buying their first home, rising rents will remain a motivating factor even as for-sale home prices and mortgage rates continue to climb,” Hale added. Source: Realtor.com

Spending for home improvements and repairs is expected to expand at a stronger pace in 2022, but signs point to some easing of growth by year end, according to the Leading Indicator of Remodeling Activity (LIRA) released by the Remodeling Futures Program at the Joint Center for Housing Studies of Harvard University. The LIRA projects double-digit gains in annual homeowner renovation and maintenance expenditure will top out in the third quarter of 2022 before beginning a deceleration toward more sustainable rates of growth. “Strong increases in home sales activity, household incomes, and home equity levels are supporting a faster expansion of the home remodeling market over the coming year,” says Carlos Martín, Project Director of the Remodeling Futures Program at the Center. “As owners continue to navigate the ups and downs of the pandemic’s trajectory, the focus on home improvements for changing wants and needs remains in sharp relief.” While annual owner improvement and repair spending could reach $430 billion by the second half of 2022, several headwinds may still temper growth expectations this year,” says Abbe Will, Associate Project Director of the Remodeling Futures Program. “The rising costs of labor and construction materials, difficulty retaining contractors, and climbing interest rates could discourage owners from undertaking new or larger remodeling projects.” Source: The Harvard Joint Center for Housing Studies