July 26, 2022 – It seems like just a few weeks ago that the Federal Reserve announced they were raising their short-term interest rates by a whopping .75%.

Economic Commentary

Here Comes the Fed — Again. It seems like just a few weeks ago that the Federal Reserve announced they were raising their short-term interest rates by a whopping .75%, with the objective of halting the rise of inflation. If we look back, the last meeting was exactly six weeks ago. And a lot can happen in six weeks. From an interest rate perspective, mortgage rates spiked in response to the last move by the Fed.

However, they quickly reversed course as analysts became concerned that these high rates would cause the economy to slow. Those same analysts would call that phenomenon “whiplash.” The volatility continued after the jobs report showed the addition of over 350,000 jobs in June, causing rates to rise again. And just to make things more interesting, the inflation report in mid-June showed that the threat of inflation is not receding as of yet.

Thus, the Fed will have plenty of data to chew upon before they release their final decision tomorrow. Right now, it appears the choice is the same as last month—either a .50% or .75% increase in short-term rates. And as we keep observing, this action would not necessarily portend another increase in mortgage rates. As a matter of fact, one day later we will see the release of the preliminary measure of economic growth for the second quarter. That could put us on the roller coaster again.

Weekly Interest Rate Overview

The Markets. Mortgage rates rose slightly in the past week. For the week ending July 21, 30-year rates rose to 5.54% from 5.51% the week before. In addition, 15-year loans increased to 4.75% and the average for five-year ARMs declined to 4.31%. A year ago, 30-year fixed rates averaged 2.78%, more than 2.50% lower than today. Attributed to Sam Khater, Chief Economist, Freddie Mac, “The housing market remains sluggish as mortgage rates inch up for a second consecutive week. Consumer concerns about rising rates, inflation and a potential recession are manifesting in softening demand. As a result of these factors, we expect house price appreciation to moderate noticeably.” 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

CoreLogic said year-over-year home price growth dipped slightly from April but still posted a 20.2% increase in May, the 124th consecutive month of gains. The company’s monthly Home Price Index and HPI Forecast noted that, though U.S. home price growth relaxed slightly in May from April, it remained in double digits year over year for the 16th consecutive month. As in past months, all states and Washington, D.C. posted annual appreciation, with 13 states posting gains of more than 20%. Selma Hepp, deputy chief economist at CoreLogic, said while rising interest rates cooled overheated demand this spring and are expected to contribute to slowing price growth over the next year, motivated buyers may have less competition and more opportunities moving forward. “Slowing home price growth reflects the dampening consequence of higher mortgage rates on housing demand, which was the intention,” Hepp said. “With monthly mortgage expenses up about 50% from only a few months ago, fewer buyers are now competing for continually limited inventory. And while annual home price growth still exceeds 20%, we expect to see a rapid deceleration in the rate of growth over the coming year. Nevertheless, the normalization of overheated buying conditions should bring about more of a balance between buyers and sellers and a healthier overall housing market.” The report indicated that annual U.S. home price gains are forecast to slow to 5% by May 2023 as rising mortgage rates and affordability challenges are expected to cool buyer demand. Source: CoreLogic

As the real estate market continues to experience a shortage of available stock and prices remain inflated, the Harvard Joint Center for Housing Studies 35th annual State of the Nation’s Housing report has found at least a partial answer to the question. According to Harvard researchers who analyzed home sales data collected by CoreLogic, investors made up 28% of single-family home sales in the first quarter of 2022. That was up from 19% in the first quarter of 2021 and far above the 16% of single home sales that went to investors between 2017 and 2019. According to the Harvard researchers, investors with large portfolios (more than 100 properties) drove much of the growth at 26%, compared to just 14% in the last quarter of 2020. “By buying up single family homes, investors have reduced the already limited supply available to potential owner-occupants and moderate-income buyers,” Harvard researchers said. And the numbers get more pronounced if all home sales are examined. According to an analysis by the real estate brokerage Redfin, investors bought more than 30% of all houses that were for sale in the first quarter of this year. Source: National Mortgage Professional

According to a new report from Redfin, the typical homebuyer could save an estimated $15,582 over five years —roughly $260 per month— by taking out an adjustable-rate mortgage rather than the typical 30-year-fixed-rate mortgage. That’s the largest savings for adjustable-rate mortgage holders since at least 2015. Redfin’s analysis is based on estimated monthly mortgage payments on the median-asking-price home during the four weeks ending mid-May for 30-year fixed mortgages and 5/1 adjustable-rate mortgages (ARM). A 5/1 ARM is a loan in which the interest rate is fixed for the first five years and then adjusts once a year for the remainder of the loan term, which is typically 30 years. Borrowers can also choose ARMs in which the interest rate resets after seven years, 10 years and other durations, but Redfin’s analysis focuses on 5/1 ARMs —one of the most popular types. Adjustable-rate mortgages often come with lower interest rates, and therefore lower monthly payments, because buyers only get to lock in their mortgage rate for a certain number of years. They’ve been rising in popularity as mortgage rates have surged at their fastest pace in decades. Adjustable-rate mortgages now make up over 10% of all mortgage applications. That’s up from approximately 3% at the start of the year, and the highest share since 2008, when a lack of regulation of ARMs helped contribute to the housing crash. Scores of borrowers were drawn to ARMs in the early 2000s due to their low initial “teaser rates”, and option for a 0% down payment. That became problematic when rates reset higher, and many buyers could no longer afford their monthly payments. Today, banks do more due diligence to check if buyers will be able to cover the increased costs when the loan resets. Source: DS News