Federal Reserve Announces Plan For Asset Purchase Drawdown – Real Estate Market Update

Just about the time you think you have an idea of the way the markets are going to react to something, they surprise you. That leads me right into our big story.

For a couple of months now, the Federal Reserve had been foreshadowing that it might be time to consider backing off asset purchases it has been making to help support the economy in response to the pandemic.

As brief background, up until Wednesday, the Federal Reserve had been purchasing $120 billion worth of assets monthly with the goal of keeping borrowing cheap for consumers. This included buying $40 billion per month of agency mortgage-backed securities (MBS). This made the Fed the biggest player in the MBS market.

When there is more interest in MBS, the yield doesn’t have to be as high in order to get someone to buy the bond. Because yields are lower, the underlying mortgages that make up the MBS can have lower rates. That’s how we got here.

The Fed would like to eventually stop making these purchases. The reasoning is that if the economy goes into another recession that the central bank has to respond to, if you’re already purchasing a large volume of MBS, that tool won’t work. Members of the Federal Open Market Committee (FOMC) would like to put it back in the tool belt while they can.

On Wednesday, the Fed outlined its plans to pull back on its purchases of assets including MBS, essentially reducing its purchases by increments of $5 billion each month until there are no new purchases being made, which would happen sometime in the middle of next year.

Because such a big buyer is making its first moves to get out of the mortgage-backed securities market, you would think rates would go up. In 2013, there was such a dramatic swing toward higher rates when the Fed sold its holdings that it was referred to as the “taper tantrum.” This time, the Committee has really worked hard to telegraph what’s coming.

It seems to have worked. Traders had the move priced into current rates. If anything, investors bought into bonds on the news of the actual plans. Perhaps there was an expectation that the initial selloff would be more dramatic. Whatever the reasons for it, rates actually went down in the wake of the announcement.

The real lesson here is that the mortgage market can be a little unpredictable. If your client sees a rate they like, you should encourage them to jump on it because no one knows what the future holds.

As always, this portion of our report is put together with the assistance of our friends at Econoday.¹

Consumer Price Index (CPI)

Overall inflation was up 0.4% in September and has risen 5.4% on the year. When food and energy were taken out, the inflation increase was 0.2% and 4% since last September. There is no doubt prices are up quite a bit across most of the economy.

However, of most concern to this audience is shelter costs. These were up 0.4% overall. Rent rose 0.5%, while the cost for homeowners to rent an equivalent space was up 0.4%.

Retail Sales

Retail sales were up 0.7% in September overall, while they rose 0.8% when removing vehicles from the equation. When both gas and vehicles were removed, the increase was again 0.7%

The best thing for a read on the housing market out of this report, though, is sales at building material and garden supply stores. These were up 0.1% from August and 5.8% since September of last year.

Housing Market Index

Overall builder sentiment was up 4 points in October to come in at 80. Looking at individual components, the present sales metric was up 5 points at 87. Meanwhile, expected sales over the next 6 months were up 3 points at 84. Finally, traffic of prospective buyers walking through new homes was up 6 points at 65.

This is an extremely strong report. It’s a good sign heading into the usually down winter months.

New Residential Construction

Housing completions in September came in at a seasonally adjusted annual rate of 1.24 million, down 4.6% from August and 13% lower than last year. Single-family completions were flat at 953,000, while there were 280,000 multifamily completions in buildings with 5 or more units.

Turning to housing starts, these were down 1.6% at 1.555 million in September. However, this number is 7.4% higher than a year ago. Single-family starts were unchanged at 1.08 million. Multifamily starts were 467,000.

Finally, permits are furthest out, but these were down 7.7% at a seasonally adjusted rate of 1.721 million annually, about where they were at this time a year ago. On the single-family side, permits were down 0.9% at 1.05 million. On the multifamily side, permits were at 498,000.

Existing Home Sales

Sales of existing homes were up 7% for the month of September at 6.29 million on a seasonally adjusted annual basis. This is down 2.3% from a year ago, but if we remember how wild the housing market was a year ago, this is still a great number.

Single-family sales alone were up 7.7% at 5.59 million while multifamily homes were up 1.4% selling at an annual rate of 700,000 units.

The downside of the sales growth was a dip in the supply in the market to 2.4 months at the current pace of sales compared to 2.6 months in August. For the sake of comparison, the market is considered in balance when the amount of supply is around 6 months. It’s definitely a seller’s market in much of the country.

In what must come as a relief to prospective buyers, the median sales price was down 1.4% to $352,800 in September. This is still 13.3% higher than the year ago at the same time. This is likely being helped by low mortgage rates, but there has to be a ceiling somewhere.

Case-Shiller Home Price Index

This index is based on home prices for all transactions regardless of financing type. It’s a rolling 3-month average made up of aggregate prices in 20 cities. Home prices in August were up 1.4% on a seasonally adjusted basis and 1.2% overall. Year-over-year gains were flat at an astronomical 19.8%.

FHFA House Price Index

The FHFA index looks at home prices across the country, but only takes into account transactions backed by conventional mortgages through Fannie Mae or Freddie Mac. It’s also not a 3-month average. That said, up to this point the two indexes had basically been in lockstep.

However, there’s a small signal that price pressure might be cooling. Prices were only up 1% in this index in August and they went up 18.5% on the year. This is down from a previous pace of 19.2%. Buyers might be getting some relief.

Consumer Confidence

Overall consumer confidence was up 4 points at 113.8. However, what’s really cool for those following housing and things that go with it is that plans to buy homes and major appliances were up as well in October.

New Home Sales

Sales of newly constructed homes had a fantastic run in September, up nearly 100,000 to a seasonally adjusted annual rate of 800,000, a 14% gain. On the downside, they were down 17.6% from September of last year, but as we’ve mentioned over and over again in several previous reports, last year was a crazy market.

The bounce back was needed because August numbers were revised down by 38,000 sales, so this was really good to see. Sales did sustain a big hit in terms of supply relative to sales, which fell from 6.5 months in August to 5.7 months in September.

The median sales price was up 1.8% to $408,800 in September, which is up 18.7% from the same time a year ago. It’s a tough market out there for a buyer, but sellers should be having a field day.

Gross Domestic Product (GDP)

Overall gross domestic product was up 2% in initial estimates for the third quarter, growing at a slower rate than 2.7% consensus estimates. The good news is that consumer spending was better than expected, up 1.6% quarter to quarter.

On the downside for those following housing, residential investment was down 7.7%, which brought down overall GDP by 0.4%. This is consecutive quarters showing a downturn in this area.

Pending Home Sales Index

The number of existing homes under contract for sale in September was down 2.3% at an index level of 116.7. This would point to lower October existing home sales numbers.

According to a Freddie Mac survey, mortgage rates were down last week. Given the timing of the collection, these would have reflected numbers from prior to the Federal Reserve announcement. Rates are still incredible, so encourage clients to take advantage.

The average rate on a purchase for a client putting 20% down was 3.09% with 0.7 points paid last week, down 5 basis points. This is up from 2.78% last year.

Looking at shorter terms, the average rate for a client with the same down payment on a 15-year fixed was down a couple of basis points to 2.35% with 0.6 points paid. This is up slightly from 2.32% a year ago.

Finally, the average rate on a 5-year treasury-indexed, hybrid adjustable-rate mortgage was down 2 basis points to 2.54% with 0.3 points paid, which fell from 2.89% at the same time in 2020.

Now that you have the knowledge you need, feel free to share with your clients and make yourself a go-to resource. For more tips and tricks, check out our Learning Center.

¹ Important Legal Notice: Econoday has attempted to verify the information contained in this calendar. However, any aspect of such information may change without notice. Econoday does not provide investment advice, and does not represent or warrant that any of the information is accurate or complete at any time. Copyright 2021 Econoday, Inc. All rights reserved.