June 14, 2022 – Here Comes The Fed. We have already had two short-term rate increases by the Fed this year.


Economic Commentary

Here Comes The Fed. Because of the pandemic, for the better part of two years we had no news from the Federal Reserve’s Open Market Committee after they lowered rates to historic lows. Obviously, a different story is unfolding in 2022. We have already had two short-term rate increases by the Fed this year and each time we meet the question is not whether they will raise rates, but by how much they will raise rates.

This week, the big money is on a half of one percent increase, and we are guessing that the markets will not react negatively if this prediction comes to fruition. Interestingly enough, the recent news pointing to an economic slowdown is starting to change the narrative from “six or seven” increases this year, to perhaps a few less. Of course, the Fed needs to see some progress on their war against inflation before this softer stance becomes a reality. Indeed, we have seen some evidence that inflation is starting to peak, outside of the two volatile components which are heavily affected by the war in Ukraine. Though last week’s consumer inflation report did not show evidence of a peak. 

These components are food and energy. The presence of these factors is why we see two measures of inflation every month. The second measure is the “core” inflation, which does not count food and energy. It is not likely that food and energy inflation will dissipate while the war and embargoes are in place. Though, any type of world-wide economic slowdown could affect energy consumption. It will be interesting if these factors will make an appearance in the Fed statement after the meeting. We know the markets will be hanging on every word.

Weekly Interest Rate Overview

The Markets. Mortgage rates reversed course and headed higher in the past week.  For the week ending June 9, 30-year rates rose to 5.23% from 5.09% the week before. In addition, 15-year loans increased 4.38% and the average for five-year ARMs rose to 4.12%. A year ago, 30-year fixed rates averaged 2.96%, over 2.25% lower than today. Attributed to Sam Khater, Chief Economist, Freddie Mac, “After little movement the last few weeks, mortgage rates rose again on the back of increased economic activity and incoming inflation data. The housing market is incredibly rate-sensitive, so as mortgage rates increase suddenly, demand again is pulling back. The material decline in purchase activity, combined with the rising supply of homes for sale, will cause a deceleration in price growth to more normal levels, providing some relief for buyers interested in purchasing a home.”  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

Housing affordability has become a key concern in the real estate market, amid rising mortgage rates and double-digit annual house appreciation. The average monthly payment is 50% higher than a year ago. Those rising costs are sidelining more aspiring home buyers. Signs are surfacing that the housing market could be slowing, and that could put less pressure on home prices. For the fourth consecutive month, sales of new homes dropped, reaching their lowest level since the pandemic. Existing-home sales also decreased in April, falling for the third consecutive month and down nearly 6% compared to a year ago, according to National Association of REALTORS® data. The latest housing data and surveys could “offer hope” for home sellers and buyers, George Ratiu, senior economist and manager of economic research at realtor.com® said in a recent report. The drop in sales could offer less competition to buyers who are eager to jump in but keep getting beat out. Also, Ratiu says sellers and buyers could be helped by the rise of remote work. “Many move-up buyers are leveraging newfound flexibility (from remote work) to employ creative strategies, such as relocating to an area offering homes that meet their family’s needs without breaking their budgets,” he says. Lawrence Yun, NAR’s chief economist, says there are scenarios in which the market soon improves for buyers. “If mortgage rates stabilize roughly at the current level of 5.3% and job gains continue, home sales could stabilize in the coming months,” Yun said. Source: MarketWatch

Nearly half of US mortgages were considered equity-rich during the first quarter of this year, according to a new report by property analytics firm, ATTOM. The ‘First-quarter 2022 US Home Equity and Underwater Report’ shows that 44.9% of mortgaged residential properties in the country were considered equity-rich in Q1, meaning that “the combined estimated amount of loan balances secured by those properties was no more than 50%” of their estimated market values. The figure was up from 41.9% in the last quarter of 2021 and up from 31.9% in the first quarter of 2021. Rick Sharga, executive vice president of market intelligence for ATTOM, said the data was positive news for millions of homebuyers and proof that they were benefiting from rising home prices. He said: “Record levels of home equity provide financial security for millions of families and minimize the chance of another housing market crash like the one we saw in 2008.” Nonetheless, he conceded that higher home prices and rising interest rates “make it extremely challenging for first time buyers to enter the market.” Across the US, median home prices rose by 2% during Q1, and 17% year over year nationally. The report also analyzed foreclosures in the US, saying that most people facing this possibility also had “at least some equity.” while adding that only about 201,000 homeowners were facing possible foreclosure in the first quarter of this year. Sharga noted: “Positive equity should give financially distressed homeowners better options than their counterparts had during the Great Recession (2008), when 33% of all homeowners were underwater on their mortgages. Hopefully, these borrowers will be able to tap into their equity to refinance their debt, or be able to leverage it to sell their property and get a fresh start.” Source: ATTOM

Homebuyers are considering many options, including relocating to other parts of the country, said Bankrate, New York. And according to a similar report from Redfin, Seattle, migrating could be their best option. The pandemic-era housing boom persists with only a slight let-up as of late. Record home prices have become the norm; bidding wars dominate many housing markets. Good news for sellers; not so good for home buyers, especially first-time buyers and millennials. Bankrate said 58 percent of all U.S. adults would be willing to take action to find more affordable housing, such as moving out of state (27 percent), buying a fixer-upper (21 percent), moving farther from family and friends (20 percent), moving farther from work (13 percent), moving to a less desirable area (11 percent), and/or some other action (3 percent). Seventy-five percent of Gen Z (ages 18-25) and 69 percent of millennials (ages 26-41) would take at least one action to find more affordable housing compared to 59 percent of Gen X (ages 42-57) and 41 percent of baby boomers (ages 58-76). “Many buyers are facing the harsh reality that they can’t afford to buy in the neighborhood they really want,” said Bankrate Chief Financial Analyst Greg McBride. “In some cases, buyers are deciding to move out of the most challenging markets. Source: Bankrate

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