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The Federal Reserve’s Opening Move

Kevin Graham6 minute-read
April 07, 2022

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Well, it finally happened. After months of anticipation and speculation, the Federal Reserve finally made its move. That leads me right into the headline of the month.

The Big Story

On March 16, the Federal Open Market Committee (FOMC), the committee responsible for setting monetary policy at the Fed, raised the federal funds rate to a range between 0.25% – 0.5%. It had been between 0% – 0.25% since the outset of the pandemic in March 2020.

At the time the announcement was made, the median projection among committee members called for the federal funds rate to be in the 1.9% area by the end of the year. Since then, in the face of a growing inflation problem, certain members of the Federal Reserve have come out with statements to the effect that rates need to be raised faster.

The theory here is that if money becomes more expensive to borrow, banks will be more cautious about lending it out. Borrowing gets more expensive for consumers and less money ends up in circulation as interest rates on savings accounts also go up. Inflation is contained. At least that’s the theory.

The second thing that’s happening as soon as May is that the Federal Reserve plans to reduce the size of its balance sheet. The balance sheet has grown as a result of the Federal Reserve buying treasury bonds, but also mortgage-backed securities (MBS). These are the underlying mechanism that make the mortgage market possible.

Because housing and the spending associated with that make up such a large portion of the economy, when the pandemic hit, the Federal Reserve went back to a familiar play: It bought MBS in order to keep mortgage rates low, thereby stimulating the economy. So why dispose of these now? There are a couple of reasons.

For starters, the Fed would love to clear room on its balance sheet in order to have flexibility to respond with something like this again in the event of a future recession or other type of economic shock. Secondly, because mortgage rates have been so low, this has contributed in part to home prices increasing at staggeringly fast levels.

Inventory is low enough that it’s likely that at least initially, raising rates might not have a dramatic impact on demand. However, there’s always a limit to budgets. If rates go high enough that many people are priced out of the market at current price levels, sellers and their listing agents may have to rethink pricing strategies if days on market begin to increase noticeably.

More News You Can Use

As always, this portion of the report wouldn’t be possible without the analysis of our friends at Econoday.1

Retail Sales

Overall retail sales were up 0.3% in the month of February and rose 0.2% when vehicles were taken out. However, when vehicles and gas were both removed, sales were down 0.4% overall.

Taking a look at home-related categories, sales of furniture and home furnishings were down 1%, on the other hand, sales at building material and garden equipment stores were up 0.9%.

Housing Market Index

Home builder sentiment came in below consensus estimates in March, falling 2 points to come in at 79. February numbers were also revised down a single point.

When we dig into the components, it’s clear that there’s builder concern about the effect that higher interest rates could have on their business. Sales expectations 6 months out are down 10 points at 70. Current sales were also down a few points at 86. In one positive sign, traffic of buyers walking through homes was up 2 points at 67.

It remains to be seen what kind of impact a new rate environment might have on builders’ plans to construct more homes. With inventory being short, a decline in this area would only exacerbate things.

New Residential Construction

It’s a mixed bag in this report if you’re looking for increased housing inventory. On one hand, overall completions were up 5.9% at 1.309 million annually. This included a 12.1% increase in single-family completions at 1.034 million units. However, the overall number is 2.8% lower than February last year. There were 266,000 completions in buildings with 5 units or more.

Turning to starts, these were up 6.8% at 1.657 million, 22.3% higher than last year. There was also a 5.7% increase in single-family starts at 1.215 million. There were 501,000 multifamily starts.

Looking at permits for future housing construction, these were down 1.9% at 1.895 million, but 7.7% higher than a year ago. Single-family authorizations were down 0.5% at 1.207 million, while there were 597,000 multifamily permits issued.

Existing Home Sales

February sales of existing homes were down 7.2% compared to January at an annual rate of 6.02 million. Compared to this time a year ago, sales are down 2.4%. Anything at or near 6 million is still a huge number of units, but it could be a sign that some buyers are really thinking things through in the face of higher rates.

At the same time, supply available in the market is at 1.7 months. Although better than record lows of 1.6 months relative to the pace of sales in January, it’s still an issue for people trying to find homes.

Homes are only on the market an average of 18 days. Meanwhile, the median price of a home was up 2.1% in February to $357,300, having risen 15% for the year.

New Home Sales

After a downward revision in January numbers, new home sales in February with down 2% at an annual rate of 772,000. This is below the consensus range analysts had anticipated for sales. Higher mortgage rates appear to be having an impact.

The median price of a new home was $400,600 in February, which fell 6.3% from January. However, prices are still up 10.7% compared to last year.

Pending Home Sales Index

The number of existing homes under contract continues to fall if this index is any indication. It was down 4.1% to 104.9. As a reminder, this means that March numbers for existing home sales are likely to be lower.

As with existing and new home sales, there is a suggestion in these reports that lower numbers this month are the result of people rushing in prior months to get ahead of rising rates.

Case-Shiller Home Price Index

Home prices were up 1.8% on a seasonally adjusted basis across the 20-city Case-Shiller index. This is a rolling 3-month average of all purchase transactions across the country.

Prices are up 1.4% when the seasonal adjustment is removed. Further, they’ve risen 19.1% on an unadjusted basis, which is 0.5% faster than the pace that was set by prices in December.

FHFA House Price Index

The FHFA House Price Index is based solely on transactions backed by conforming loans from Fannie Mae or Freddie Mac. It’s also not an average, so that may account for some of the differences, but prices were up 1.6% in this index and they’ve risen 18.2% since the same time a year ago. Both home price indexes are very elevated.

Consumer Confidence

Overall consumer confidence was up 1.5 points to 107.2 in March, albeit with a heavy revision downward in February numbers. At the same time, according to the analysis home buying plans remain unchanged, despite the prospect of higher rates. That should be heartening if you’re working in real estate.

Gross Domestic Product (GDP)

In a finalized analysis for the fourth quarter, the economy grew at a rate of 6.9% including a 2.5% uptick in consumer spending.

Residential investment was revised up to 2.2% growth vs. 1% growth in the second estimate for the quarter. That’s a real positive.

Mortgage Rates

The Fed is looking to raise rates and sell off MBS in order to dampen inflation and the market is officially taking notice. One need only look at how much the average 30-year fixed mortgage rate has changed in the last week, based on a Freddie Mac survey.

If your clients are ready to purchase, great. You can help them in this market by making sure they know their budget and they have a rock-solid preapproval. Provide value and listen to their needs all the time, but especially right now. They’ll appreciate it.

The average rate on a 30-year fixed mortgage with 0.8 points paid in fees was up 25 basis points last week to settle at 4.67%. This has risen from 3.18% a year ago.

Looking at shorter terms, the average rate on a 15-year fixed mortgage with the same number of points paid was up 20 basis points to 3.83%. This is up from 2.45% last year.

Finally, the average rate on a 5-year treasury-indexed, hybrid adjustable-rate mortgage with 0.3 points paid was up 14 basis points to 3.5%, rising from 2.84% last year.

Now that you know all the news that’s fit to print, use this knowledge to wow your clients!

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 2022 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.