November 2, 2021 – Why Tapering Might Not Matter That Much. We think that tapering may not move interest rates as much as some might think.


Economic Commentary

Why Tapering Might Not Matter That Much. The Federal Reserve’s Open Market Committee is meeting this week and the decision on whether to taper their purchases of bonds and mortgages will be front and center. The minutes of the Fed’s last meeting had indicated the tapering might start in November or December. While this is a major topic of conversation, we think that tapering may not move interest rates as much as some might think. Here are three thoughts that support this reasoning.

First, rates have already trended upward in anticipation of this event. The markets move in anticipation of such adjustments and rates are likely to move upward further only if the economic recovery does not falter. Secondly, there is a lot of cash sitting on the sidelines in the world today. The presence of this cash indicates that the markets are more likely to absorb this additional supply.

Finally, at least on the mortgage side, the volume of mortgages produced is expected to fall as rates have risen because refinance volume will subside. This decline will mitigate the effects of the Fed tapering purchases. Again, the key here is the strength of the recovery. The announcement that the first measure of third quarter economic growth slowed was not a surprise, though the magnitude of the slowdown was greater than forecasted. A surprise to the upside would have pushed interest rates upward much more quickly than the pace of tapering. Could this news slow the pace of tapering? We might find out shortly.

Weekly Interest Rate Overview

The Markets. Mortgage rates continued to move higher in the past week. For the week ending October 28, 30-year rates rose to 3.14% from 3.09% the week before.  In addition, 15-year loans increased to 2.37% and the average for five-year ARMs rose to 2.56%. A year ago, 30-year fixed rates averaged 2.81%, more than .25% lower than today. Attributed to Sam Khater, Chief Economist, Freddie Mac – “The yield on the 10-year Treasury note has been trending up due to the decline in new COVID cases, increasing consumer optimism, as well as broadening inflation and persistent shortages. Mortgage rates are also rising, but purchase demand remains firm, showing that latent purchase demand exists among consumers.”   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

Demand is surging for rental units and that is pushing up prices. The amount homeowners could receive from renting their home increased by 0.4%, which may seem small but is the largest one-month increase since 2006, according to the latest Consumer Price Index. Rents of primary residences jumped by 0.5%, the largest one-month increase since 2001. “This might just be an overshoot after a couple of relatively modest increases, but we can’t rule out the idea that the fundamentals—rapid house price gains, more aggressive landlord pricing, low inventory, and faster wage growth—are pushing up the trend,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, told MarketWatch. The end of the eviction moratorium in September may also have put pressure on rents to rise, housing analysts say. Home prices also have been on the rise as demand surges in the pandemic for housing. Real house prices have been increasing about 100 times faster than they did from 1955 to 1998, MarketWatch reports. Also, demand for urban housing is recovering after last year’s exodus to the suburbs, says Will Compernolle, senior economist at FHN Financial Markets. Housing prices are expected to continue to rise, analysts say. “The rising cost of shelter, which is a significant component of overall inflation, is a result of higher construction costs and insufficient inventory,” Robert Dietz, chief economist for the National Association of Home Builders, told MarketWatch. Source: MarketWatch

Home buyers are bidding up home prices as they compete for homes. But appraisals don’t always agree with the offer the seller finally accepts. Some homes are appraised below the agreed-upon sales price, which could upend a deal. Twenty-three percent of contracts were delayed due to appraisal issues, according to the latest REALTORS® Confidence Index Survey, based on a survey of real estate professionals’ transactions. About 12% of transactions were then terminated due to appraisal issues. “I don’t remember any time where the frequency of buyers being willing to pay so much more than the market data was this high,” Shawn Telford, chief appraiser at CoreLogic, told The Wall Street Journal. Many buyers are stretching their budgets to win a bidding war. But mortgage lenders will usually only offer a loan amount for the appraised value of a home. When a home appraises too low, parties must come back to the negotiation table. Sellers may need to agree to lower the price or buyers may have to come up with more money on their own. If all else fails, the deal may fall through. Appraisers usually factor in recent closed and pending sales to determine the value of a home. But a sale can close in a month or two after going under contract. In a fast-moving market, some home sellers complain that appraisals aren’t keeping pace. Appraisers told The Wall Street Journal that they have a thorough assessment for valuating a home that goes beyond what just a buyer is willing to pay during a bidding war. They want to protect buyers from overpaying, Joan Trice, president of the Collateral Risk Network, told the Journal. The Collateral Risk Network is an organization for both appraisers and lenders. Some buyers are waiving appraisals to make their offer in a bidding war stand out even more to a home seller. But that is lessening somewhat: Twenty-five percent of buyers waived their appraisal contingency clause in August, down slightly from 27% in July. Source: The Wall Street Journal

Some first-time homebuyers are taking a creative route to make it happen—by pooling their finances with partners, friends or roommates. Since 2014, when millennials became the largest share of homebuyers in the U.S., the number of home and condo sales across the country by co-buyers has soared. The number of co-buyers with different last names increased by 771% between 2014 and 2021, according to data from real-estate analytics firm Attom Data Solution. The pandemic added fuel to that trend, according to data from the National Association of Realtors. Among all age groups during the early pandemic months—April to June 2020—11% of buyers purchased as an unmarried couple and 3% as “other” (essentially, roommates). Those numbers were up from 9% and 2%, respectively, in the previous year. There may also be cultural factors at play in the co-buying trend. Many millennials are putting off getting married and having children until later in life than previous generations, but not all of them want to live alone. “A lot of them want to live in a communal setting, but they have enough money and they’re looking around at the increase in real-estate prices, and they want to get a foothold in this appreciating market,” says Andy Sirkin, a real-estate attorney specializing in co-ownership. Source: The New York Times

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