March 22, 2022 – The Fed Balances Inflation and Ukraine. The Federal Reserve’s Open Market Committee met last week.


Economic Commentary

The Fed Balances Inflation and Ukraine. The Federal Reserve’s Open Market Committee met last week and raised their base interest rates by one-quarter of one percent. As mentioned previously, the betting line just a few weeks ago was for an increase of one-half of one percent. This smaller measure is being attributed to the Fed being mindful of the effects the Ukraine invasion is having upon the world. But the truth is that the Fed could not risk ignoring the inflation factor.

Thus, what you had was a balance. A smaller step today, but stronger language regarding the future of rate increases. Absent of significant intervening factors, there is no doubt that this action is the first of several this year by the Fed. What intervening factors could cause the Fed to stop in their tracks? Certainly, an escalation of the Ukrainian conflict or a downturn in the economy due to previous or subsequent economic sanctions. Let’s add an escalation in the COVID pandemic, which presently seems to be fading as the weather gets warmer.

The truth is, we don’t know what factor could halt the Fed’s plans to continue to raise short-term rates this year. The market has already anticipated these increases, with long-term rates such as mortgages rising well over 1.00% in the past months. With inflation raging and the economy continuing to recover strongly, the future seems to be set — save the previously mentioned known or unknown factors. While inflation is the current economic enemy, the fact that the economy is strong is a good thing, buoyed by the reality that the world is getting back to normal, with a watchful eye upon the Ukraine factor.

Weekly Interest Rate Overview

The Markets. Mortgage rates continued to rise in the past week.  For the week ending March 17, 30-year rates rose sharply to 4.16% from 3.85% the week before. In addition, 15-year loans increased to 3.39% and the average for five-year ARMs also climbed to 3.19%. A year ago, 30-year fixed rates averaged 3.09%, more than 1.00% lower than today. Attributed to Sam Khater, Chief Economist, Freddie Mac, “The 30-year fixed-rate mortgage exceeded four percent for the first time since May of 2019. The Federal Reserve raising short-term rates and signaling further increases means mortgage rates should continue to rise over the course of the year. While home purchase demand has moderated, it remains competitive due to low existing inventory, suggesting high house price pressures will continue during the spring homebuying season.” 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

The share of home buyers planning to move from one region to another has grown as many Americans look to relocate to more affordable regions of the U.S. Nearly one in three home buyers—or 32%—say they want to relocate, a record high, according to a new consumer survey conducted by Redfin. Remote work policies, new job opportunities, and ongoing shortages of affordable housing will likely keep Americans moving, economists say. “I predict the share of home buyers looking to move to a different area will continue to rise throughout the year,” says Daryl Fairweather, Redfin’s chief economist. “With mortgage rates going up and rents skyrocketing, moving somewhere more affordable is one of the only ways for many Americans to stay within their housing budget. Even workers who are unable to work from home should feel confident about finding a job in a new location with the tight labor market.” As mortgage rates rise, aspiring buyers may feel more pressure to move. A separate consumer survey from the real estate tech company OJO Labs found that more than 50% of prospective buyers felt optimistic about buying a home over the next three months. Source: Redfin and REALTOR® Magazine

The American home is getting larger. The pandemic has prompted more homeowners to want more space to spread out in, and also may have encouraged bigger households as more people live under one roof. That has led to an increase in the size of new single-family homes. The median single-family square floor area has increased to 2,338 square feet. The average square footage for new single-family homes rose to 2,561 in the fourth quarter of 2021, according to U.S. Census Bureau data. The average size of new single-family homes is 6.3% bigger than the lows set during the Great Recession, the National Association of Home Builders reports. The median house size is 10% higher. “Going forward, we expect home size to continue to increase, given a shift in consumer preferences for more space due to the increased use and roles of homes—for work, among other purposes—in the post-COVID-19 environment,” Robert Dietz, the NAHB’s chief economist, writes for the association’s “Eye on Housing” blog. Source: National Association of Home Builders’ Eye on Housing blog

According to a new report from Redfin, the typical American homeowner in 2021 had spent 13.2 years in their home—down slightly from the peak of 13.5 years in 2020, but up significantly from 10.1 years in 2012. Homeowner tenure fell last year in part because so many Americans moved throughout the pandemic, with record-low mortgage rates motivating homebuyers to dive into the market. Pandemic-fueled remote work also led to a record share of Americans relocating, most often to more affordable areas. Overall, Americans are still living in their homes longer now than before because of older homeowners aging in place, a shortage of homes for sale, and relatively low monthly payments. Many Americans have refinanced their homes over the last decade to get a favorable mortgage rate. Some homeowners who refinanced would have locked in last year’s historically low rates, deterring them from moving. This could lead to tenure increasing in the next few years, while rising rents could be another factor, as some homeowners may choose to rent out their homes rather than sell. “Homeowner tenure may have already peaked, or the decline in 2021 could be a blip before it climbs back up,” said Redfin Chief Economist Daryl Fairweather. “There are competing forces at work. Remote work is encouraging homeowners to sell their homes in expensive cities and move to more affordable areas, which could pull tenure down. But on the flip side, rising mortgage rates may discourage people from selling and older Americans are staying put longer, which could push it back up.” The supply shortage is one reason why homeowners are staying put, and the reverse is also true. Long-term homeowner tenure is one factor in the ongoing housing-supply shortage and the ultra-competitive market, with the number of homes for sale down nearly 50% from before the pandemic. “The migration trend is encouraging for supply because more people moving typically means more people selling their homes,” Fairweather said. “Adding supply will help the housing market keep up with demand and start relieving buyers from heated competition and rapidly rising prices.” Source: MReport

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