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Mortgage Rates Remain Low Amid Constrained Supply – Real Estate Market Update

Kevin Graham6 minute-read
October 13, 2021

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If you’re working in real estate right now or really any time, the key questions you might find yourself asking are: where mortgage rates are going and how fast?

If I had the answers to those questions, I wouldn’t be telling you because I would also have the winning lottery numbers and I might not be working. However, what I can promise you is analysis.

The Big Story

The average mortgage rate according to Freddie Mac is still under 3%, but how long is it going to stay in this range? Rather than just give you the shrug emoji, let’s do a little analysis, and then end up with no answer. But hey, it’s about the effort and the exercise. We can at least give you things to think about.

Any discussion of mortgage rates happening right now has to start with the Federal Reserve. In its most recent statement, the Fed explicitly acknowledged its desire to start backing off their purchase of agency mortgage-backed securities (MBS). This program has been helping keep mortgage rates low because if there is always a buyer, the yield doesn’t have to be as high to attract purchase.

The Fed does this because housing is a huge part of the economy. Not only that, but you have to furnish the house and people often pay for things like lawn care and/or snow removal. The bottom line is housing touches a lot of different sectors.

The Fed is considering backing off because if they kept doing this and there was another recession in the future, they won’t have the option of stimulating the economy by lowering mortgage rates because they’ve already done it to the maximum extent possible.

One thing we think we know is that when the Fed does make a decision to stop buying mortgage bonds, rates will almost certainly go up. The Fed is buying a ton of MBS and in order to make up the volume, there will be multiple new buyers who will most likely want higher yields.

Before the most recent jobs report, it was widely expected that the Federal Reserve would begin drawing down their MBS purchases before the end of the year. Then the employment report came out and while more people got jobs, the number was pretty disappointing in light of the expectations of analysts.

Essentially, the theory goes that evidence that the economy is recovering slower than expected might give the Fed pause. Whether that actually does happen won’t be something we know until the beginning of November. The board might not change its mind at all. We just don’t know.

As I said, only the Fed has the answers, but what we know is that rates are really good right now. If you’ve got a client on the fence, they should consider applying to take advantage of the current market dynamics.

More News You Can Use

Here’s everything else you need to know. As always, these sections are prepared with the help of our friends at Econoday.1

Consumer Price Index (CPI)

Inflation is up 0.3% overall for the month of August and 5.3% on the year. However, what’s of the most concern to this audience is the shelter component. That was up 0.2% in August and only 2.8% on the year. Both rent and the cost for homeowners to rent an equivalent space were up 0.3%.

This is a bit out of step with what we’re seeing in some other home price indexes, but it’s plausible when you consider that the monthly cost can be much lower when spread out on a 30-year fixed payment.

Retail Sales

Retail sales were up 0.7% overall, but we care about what’s going on in the housing market. Furniture and home furnishings were up 3.7% monthly. Meanwhile, sales of building materials and garden supplies were up 0.86% in August.

Housing Market Index

The overall feeling among builders in the housing market was that things were slightly better in September, up 1.76. Expected sales over the next 6 months were 81, where they were in August. Meanwhile, present sales were up 1 point to 82. Finally, traffic of prospective buyers going through homes was up a couple of points at 61.

New Residential Construction

Permits are very far off in the future before they turn into completed housing, if that happens at all. What we really care about are completions and starts. Let’s run through this.

Completions were down 4.5% in August at 1.33 million, but this is 9.4% higher than where we were at this time in 2020. The good news is that single-family starts were up 2.8% at 945,000, while there were 356,000 multifamily completions.

On the start side, these were at 1.615 million, 3.9% higher than they were last month and 17.4% higher than August. On this side, single-family starts were down 2.8% at 1.107 million while there were 530,000 multifamily starts.

Existing Home Sales

Existing home sales in August were down 2% at 5.88 million. Sales were down 1.5% from a year ago, but last year was unsustainably hot for a while.

Meanwhile, the median existing home price was $356,700, up 14.9% from last year at the same time. Driving this is a lack of supply. Total supply in the market was down 1.5% at 1.29 million units. At the current pace of sales, there are 2.6 months’ worth of supply available nationwide. A market is usually considered in balance when supply compared to sales is at 6 months.

New Home Sales

Builders are on pace to sell 740,000 houses on a seasonally adjusted basis as of August 2021, a gain of 1.5% compared to a year ago, but 24.3% below last year. The median sales price was unchanged at $390,900.

Unlike the market for existing homes, there’s some sanity here because supply levels are decent. There are 378,000 units for sale as of the report, representing 6.1 months’ worth of supply.

Case-Shiller Home Price Index

On an adjusted basis, home prices were up 1.5% in the month of July and 1.6% overall across the 20 cities surveyed. This is a rolling 3-month average of all home sales. Home prices are up 19.7% overall since last year, according to the survey.

FHFA House Price Index

Prices of homes backed by conventional loans were up 1.4% in July. Unlike the Case-Shiller index, this is not a 3-month average, but a month-to-month reading. Despite this, the numbers are shockingly similar, with year-over-year appreciation being up 19.2%.

Pending Home Sales Index

The number of homes under contract for sale in the month of August increased by 8.1% to an index level of 119.5. This more than offsets a couple of months of 2% declines. This is a good sign for future sales of existing homes.

Gross Domestic Product

In the final reading for the second quarter, the economy grew 6.7%, with 12% growth in consumer spending. However, in terms of what we really care about in real estate, residential investment was down 11.7% in the second quarter.

Mortgage Rates

As we mentioned above, mortgage rates are really good right now, but it’s anyone’s guess as to how long that will stay that way. If you have clients who are on the fence, the current market favorability can’t be overstated.

The average rate on a 30-year fixed according to Freddie Mac was down 2 basis points at 2.99% with 0.7 points paid in fees, up from 2.87% at this time last year.

In shorter terms, the average rate on a 15-year fixed was down 5 basis points to 2.23% with 0.7 points paid. This has fallen from 2.37% a year ago.

Rounding it out, the average rate on a 5-year, treasury-indexed, hybrid adjustable-rate mortgage with 0.3 points paid was up 4 basis points to 2.52%, but that’s fallen from 2.89% at the same time last year.

Now that you have the knowledge, spread it to your clients. A prepared client is a confident client. If you haven’t already, sign up for Rocket ProSM Insight and get all the info on your clients’ mortgage process with Rocket Mortgage®.

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.

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    Kevin Graham

    Kevin Graham is a Senior Blog Writer for Rocket Companies. He specializes in economics, mortgage qualification and personal finance topics. As someone with cerebral palsy spastic quadriplegia that requires the use of a wheelchair, he also takes on articles around modifying your home for physical challenges and smart home tech. Kevin has a BA in Journalism from Oakland University. Prior to joining Rocket Mortgage he freelanced for various newspapers in the Metro Detroit area.