July 27, 2021 – The Word of the Day — Tapering. The Federal Reserve Board’s Open Market Committee meets this week.

Economic Commentary

The Word of the Day — Tapering. The Federal Reserve Board’s Open Market Committee meets this week and there is little to no chance they will change interest rates. As a matter of fact, it was big news surrounding the previous meeting because they indicated that they will “consider” raising rates as early as 2023. Thus, you would think that this meeting should be of little importance.

On the other hand, the markets are always interested in what the Fed says in their statement ending the meeting. And this time they will be focused upon one word – tapering. Since the pandemic hit, the Fed has been supporting the markets by purchasing massive amounts of US Treasuries and mortgages. The Fed controls short-term interest rates directly. But they have also influenced long-term rates – especially mortgage rates – through these asset purchases.

It is unlikely that rates on home loans would have hit and stayed at these historic lows without the Fed pursuing this course of action, especially now that the economy is recovering. As a matter of fact, mortgage rates would have stayed stubbornly high at the beginning of the recession, as there would have been a lack of purchasers for mortgages in the markets. Tapering means that they will start to slow down these purchases now or in the future because there is now support for these markets. Even the mention of this word could affect the interest rate markets. Thus, the market analysts will be watching closely.

Weekly Interest Rate Overview

The Markets. Rates continued their march toward record lows last week.  For the week ending July 22, Freddie Mac announced that 30-year fixed rates decreased to 2.78% from 2.88% the week before. The average for 15-year loans fell to 2.12% and the average for five-year ARMs rose slightly to 2.49%. A year ago, 30-year fixed rates averaged 3.01%, .23% higher than today. Attributed to Sam Khater, Chief Economist, Freddie Mac – ” Concerns about the Delta variant, and the overall trajectory of the pandemic, are undoubtedly affecting economic growth. While the economy continues to mend, Treasury yields have decreased, and mortgage rates have followed suit. Unfortunately, many homebuyers are unable to take advantage of low rates due to low inventory and high prices.” 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

Veros Real Estate Solutions, an industry leader in enterprise risk management and collateral valuation services, released its Q2 2021 VeroFORECAST data that anticipates home prices will continue to appreciate at high levels during the next 12 months in the 100 most-populated markets at a rate consistent with our previous update one quarter ago. Veros is committed to the data science of predicting home value based on rigorous analysis of the fundamentals and interrelationships of numerous economic, social, and geographic variables as they pertain to home value. This data-driven approach indicates that many of the top-performing cities are trending upwards at a double-digit rate. By Q2 2022, the overall average forecast is up 7% which is consistent with the annual forecast made in this forecast one quarter ago. “The VeroFORECAST data continues to exhibit upward price pressure in nearly all markets throughout 2021 and into 2022,” said Darius Bozorgi, CEO of Veros Real Estate Solutions. “Buyer demand is strong in nearly every market in the country. We are squarely in a seller’s market and buyers have no choice but to put forward the best offer they can, frequently making offers above asking price, to secure the home they want to own.” “Right now, buyers are acting on pent-up demand and sellers are seeking top dollar for their homes,” said Eric Fox, Veros Real Estate Solutions Chief Economist. “The tight inventory of for-sale homes, coupled with low interest rates are keeping prices strong across the country.” The record-low interest rate environment is likely to be in place for the foreseeable future. “The Federal Open Market Committee participants recently indicated that risks to inflation were weighted to the upside. Despite that, they have not slowed the pace of bond buying. They have their foot on the accelerator full speed ahead and are only thinking about discussing slowing down,” added Fox. Source: Veros Real Estate Solutions

Adjustable-rate mortgages became unpopular after the 2008 financial crisis, but they are reemerging as buyers contend with record high home prices. “The epic surge in home prices has people looking to save money on monthly payments anywhere they can,” Matt Graham, chief of operations at Mortgage News Daily, told realtor.com®. Applications for ARMs are up 12.5% year over year for the week ending June 18, according to the Mortgage Bankers Association. ARMs offer rates that reset after a period of years. If rates go up by the time borrowers’ loans reset, they will likely face higher monthly payments. Financial experts warn that borrowers taking out ARMs today at historically low rates likely will face higher rates and payments in the future. Lenders say that only the most qualified borrowers are getting approved for ARMs; they tend to have higher credit scores and put more money down than fixed-rate mortgage borrowers. There is also more education around these loans than in the days of the financial crisis. Interest-only ARMs are also less prevalent. ARMs are a relatively small part of the market, comprising just 3.6% of applications for the week ending June 25, according to the Mortgage Bankers Association. In general, financial experts say ARMs are less useful for homeowners who plan to stay in their homes for decades. But for those who plan to stay in their homes for less time, ARMs may be more attractive. ARMs are most popular among borrowers seeking higher balanced loans. The average ARM loan size was $904,000 compared to $317,500 for a fixed-rate loan for the week ending June 25, according to the MBA’s data. Source: realtor.com®

Job losses during the COVID-19 pandemic hit the Asian American community particularly hard. About 60.6% of Asian Americans and Pacific Islanders are homeowners. While that’s a higher percentage than other minority groups, the numbers are lower than the national average of 65.6% in the first quarter of 2021, according to a new report, the 2021 State of Asia America, from the Asian Real Estate Association of America in partnership with Freddie Mac. For comparison, the white homeownership rate is 73.8%. “The challenges we face grew substantially throughout the pandemic, including job losses and housing discrimination that are forcing so many to stay in their current communities rather than move to new and unfamiliar places,” said Amy Kong, AREAA’s president. Kong also stressed the importance of alternative credit needs “as so many in the AAPI community have been culturally adverse to credit, but have good jobs and savings. We also are working hard on overcoming language barriers, especially when it comes to paperwork involved in real estate transactions.” The challenges in homeownership are occurring despite Asian Americans tending to have higher incomes than the national average—$93,759, which is 35% higher than the national average, the report notes. Source: Asian Real Estate Association of America