January 11, 2022 – The Fed Spoke – Why Didn’t Rates Rise Immediately? We think it is best to remind our readers when the Federal Reserve hits the headlines.

Economic Commentary

The Fed Spoke — Why Didn’t Rates Rise Immediately? We think it is best to remind our readers when the Federal Reserve hits the headlines. Close to a month ago, the Fed met and came out with some pretty strong statements. First, they sped up the tapering of their purchases of bonds and mortgages after supporting the markets throughout the pandemic. Second, they “projected” multiple rate hikes in 2022. As a result, many braced for further rate increases.

Only this did not happen. There are plenty of reasons for this lack of reaction by the markets. Regarding tapering of their purchases, it is assumed the Fed had determined that the markets could stand on their own two feet without the Fed support. In fact, one reason there is inflation today is that there is too much cash chasing too few goods. Thus, there is plenty of appetite for investments such as bonds and mortgages. Increasing home prices make mortgages an even safer investment.

With regard to hiking interest rates, we must remember that the Fed controls short-term rates directly. We are talking “overnight,” which is very short-term. The rates consumers deal with, such as mortgages, are very long-term. Mortgage rates move with the markets.  And while the Fed has not raised rates in years, long-term rates have already risen by one-half of one percent within the past year. Thus, the Fed move is trailing the markets.  As a matter of fact, the Fed’s strong language to control inflation may serve to calm the markets. We are not saying that rates will not rise this year, and if the first few trading days of the year is any indication, it looks as though the trend will continue to be higher. Especially as the markets reacted to a reminder of the Fed statement through the release of the minutes of their meeting last week.

Weekly Interest Rate Overview

The Markets. Mortgage rates continued to rise in the past week and the increase accelerated after the release of the minutes of the last Fed meeting. For the week ending January 6, 30-year rates moved up to 3.22% from 3.11% the week before. In addition, 15-year loans rose to 2.43% and the average for five-year ARMs remained at 2.41%. A year ago, 30-year fixed rates averaged 2.67%, more than .50% lower than today. Attributed to Sam Khater, Chief Economist, Freddie Mac, “Mortgage rates increased during the first week of 2022 to the highest level since May 2020 and are more than half a percent higher than January 2021. With higher inflation, promising economic growth and a tight labor market, we expect rates will continue to rise. The impact of higher rates on purchase demand remains modest so far given the current first-time homebuyer growth.”  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

First American’s proprietary Potential Home Sales Model measures what the healthy market level of home sales should be based on economic, demographic, and housing market fundamentals. For the month of November, the main takeaways were: potential existing home sales decreased to 6.26 million annualized rate (SAAR), representing a 79.5% increase from the market potential low in February 1993. However, the market potential for existing-home sales increased 7.2% year-over-year, a gain of 422,000 (SAAR) sales. Currently, potential existing-home sales is 533,000 (SAAR), 7.9% below the pre-recession peak of market potential, which occurred in April 2006. “Demand for homes was strong prior to the pandemic,” said Mark Fleming chief economist at First American, “then housing demand accelerated amid the pandemic as buyers wanted more space, enjoyed more geographic flexibility in where they could live, and benefited from increased house-buying power driven by record-low mortgage rates. While many of these factors will remain consistent in 2022, mortgage rates are widely expected to rise, so how will that impact home sales?” Fleming explains that existing-home sales don’t always slow down when mortgage rates rise and are often more influenced by why mortgage rates are rising. “Looking back over almost 30 years, there have been six significant rising-mortgage rate eras,” said Fleming. “Rising mortgage rates led to declining existing-home sales in two of the six rising-rate eras.” Overall, Fleming demonstrates through these examples that existing home sales are resilient in a rising-rate environment. “For example,” he says, “mortgage rates spiked in the summer of 2013 when the Fed indicated it would taper its quantitative easing policy of buying Treasury bonds and mortgage-backed securities. But this ‘taper tantrum’ had no negative impact on existing-home sales.” Source: National Mortgage Professional

More first-time buyers hope to transition from renting to owning in 2022. After a challenging 2021, many are looking ahead to the new year for an opening in the market—one where competition may not be as tight as it has been this year. Aspiring first-time buyers are already actively looking: 40% say they’re researching home values in their target neighborhood, 34% say they’ve researched the real estate process, 30% have talked to family and friends for advice, 25% have been in contact with a real estate agent, and 15% have been preapproved for a mortgage, a new survey from realtor.com® finds. Sixty-one percent of first-time buyers are looking for a home priced at or below $350,000, according to the realtor.com® survey. To be competitive, 34% of first-time buyers say they are checking listings every day; 25% say they’re willing to put more than 20% down; 22% say they’re willing to make an offer within 48 hours of seeing a home they want; 22% say they’re willing to go over budget. However, they are less willing than other buyers to forgo contingencies or compete in a bidding war, the survey found. Source: realtor.com®

According to a report from Redfin, the demand for second homes and investment properties was up 83% from pre-pandemic levels in November, an increase over October’s 72% increase, but still below January 2021’s record reading of 91%. Demand remains high as many businesses are offering full remote and/or hybrid work situations for their staff, leaving many affluent white-collar workers with the ability to work from beach houses and ski chalets, according to a recent Redfin recap of 2021. But even as the overall housing market has begun its typical seasonal cooldown, demand is expected to remain above pre-pandemic levels. “A combination of permanent remote-work policies and record-low mortgage rates is contributing to an uptick in demand, with buyers racing to snag vacation homes before interest rates increase further,” said Redfin Deputy Chief Economist Taylor Marr. “I expect demand for second homes to remain strong for at least the full duration of the pandemic, which is now being prolonged by the spread of the Omicron variant.” Not all of these second home purchases were sold to remote workers, as real estate investors contributed to the elevated interest in second homes. Redfin found that real estate investors bought 18.2% of the homes purchased nationally during Q3 of 2021, a record-high share, up from 11.2% year-over-year. In dollar terms, investors bought a record $63.6 billion worth of homes over that period, up from $35.7 billion a year earlier. Source: MReport