Market Update.

Federal Reserve Looking To Make Moves – Real Estate Market Update

Kevin Graham6 minute-read
February 10, 2022


“The times, they are a-changin’.” Real estate agents would do well to remember the words of Bob Dylan at the moment. Rates look to be on the rise, but not too much just yet. Here’s what you need to know to help your clients navigate the evolving real estate market.

The Big Story

The Federal Reserve has shown it intends to bring to an end the special economic support that was put in place as a result of COVID-19. There are multiple reasons for this. One, it gives you more tools to respond to the next crisis if you start to normalize things.

But the biggest concern right now is inflation, which is running at a 7% annual rate at the moment according to some key metrics. Regular watchers of the Fed – we are the few, the proud, the aces of econ class – will know that the Fed would prefer to keep inflation around 2%.

In the Committee’s judgment, that’s enough to keep people purchasing due to the threat of rising prices, an economic stimulant, but not so much that it seriously depletes the worth of currency that you already have. Inflation rates around 7% create a serious danger of that if they hold long-term.

In order to bring inflation under control, the Fed has indicated that it’s probably going to be appropriate to raise short-term interest rates in March. Depending on which analyst you read, this could be the first of up to five increases this year, with the first one being as much as 0.5%.

In addition, to bring the balance sheet under control, the Fed will be stopping the purchase of mortgage-backed securities (MBS) within the next couple of months and, at some later date, potentially selling them back into the market.

Combined, this means mortgage rates will likely be going up for a while into the future. We’ve already started to see it happen. According to the weekly Freddie Mac survey, the average 30-year fixed mortgage rate is up almost 0.5% since the end of 2021.

While this means higher costs for your clients in theory, home prices are already not appreciating at the insanely high levels they were from much of 2020 and the beginning of 2021. Because the ever-increasing home prices were in part supported by lower interest rates, once people realize the market is swinging the other way, there could actually be some relief on the horizon for home buyers.

More News You Can Use

This portion of the report is aided by analysis from Econoday.1 Let’s jump in.

Consumer Price Index (CPI)

Consumer prices were up 0.5% overall in December and 7% on the year. When food and energy were taken out, the gain was 0.6% with a 5.5% increase since December 2020.

However, of most interest to those in real estate, the cost of shelter was up 0.4% as both rent and owners’ equivalent rent increased.

Retail Sales

Retail sales were down 1.9% overall at a total of $626.8 billion in December, but how did retailers that tend to do better when people are investing in houses fare?

Sales at building material and garden equipment stores in December totaled $41.371 billion, up 2.2%. When it comes to furniture and home furnishings, sales were down about 5.52% at $11.795 billion.

Housing Market Index

This measure of home builder sentiment from the National Association of Home Builders was down just a single point at 83 in January. This is still an incredible number.

Present sales came in at 90, while the component measuring expected sales over the next 6 months was down 1 point at 83. Traffic of prospective buyers going through homes also had a slight index dip, down 1 point at 69.

New Residential Construction

Let’s start with the stage that has the most immediate impact on supply. Completed construction in housing was down 8.7% in December to a seasonally adjusted annual rate of 1.295 million units. However, as we all know, most of the housing inventory in this country is of the single-family variety. Here units were up 3.9% to 990,000. Meanwhile, 299,000 units were completed in multifamily buildings with 5 units or more.

More ground was broken in December as starts were up 1.4% overall at 1.702 million annually. However, here we see the opposite of what we saw in completions. Single-family starts were down 2.3% at 1.172 million. Multifamily starts came in at 524,000.

Finally, building permits were up 9.1% at 1.873 million annually. On the single-family side, permits were up 2% at 1.106 million to go along with 675,000 multifamily units. It’s noted that a legal change in Philadelphia meant it made more sense for builders there to get their permits in before the end of the year, which helped impact these numbers.

Existing Home Sales

Sales of existing homes were down 6% in December and have fallen 8.3% since the same time a year ago. Although higher mortgage rates have certainly played a role, the bulk of the problem lies with a lack of supply. Supply fell to 1.8 months at the current pace of sales compared to 2.1 months in November. People just can’t find homes.

It’s not a function of pricing, either. The median home cost was unchanged at $354,300.

Case-Shiller Home Price Index

The Case-Shiller Home Price Index is a rolling 3-month average of home prices based on transactions in 20 major metropolitan areas. Prices were up 1.2% on a seasonally adjusted basis and rose 1% overall in November. Prices are up 18.3% since the same time a year ago. While still incredibly high, that’s off peak numbers in the 19% range.

FHFA House Price Index

The FHFA House Price Index isn’t based on an average. It also only looks at home sales financed by conforming mortgages backed by Fannie Mae or Freddie Mac. Nevertheless, there are some similarities. Prices were up 1.1% in November and 17.5% since the same time a year ago.

Consumer Confidence

Overall consumer confidence fell 1.4 points in January to come in at 113.8. The good news for those of us who work in and around the real estate space is that the proportion of consumers looking to buy both homes and appliances over the next 6 months increased.

New Home Sales

Sales of newly built homes were up 11.9% at 811,000 on an annual basis in December. It’s worth noting that sales levels aren’t the same everywhere. While they are up 56.4% in the Midwest and 14.9% in the South, they’re down 15.6% in the Northeast. Sales were close to flat in the West, up 0.4%.

The median price of a new home was down 9.2% at $377,700. It’s speculated that more renters are entering the market and buying up starter home inventory.

Gross Domestic Product (GDP)

Overall economic growth proceeded at a rate of 6.9% in the first estimate of the fourth quarter, including a 3.3% uptick in consumer spending. In the fourth quarter, residential investment was down 0.8% on a seasonally adjusted basis.

Pending Home Sales Index

The number of existing homes under contract for sale (pending) fell 3.8% to an index level of 117.7. These December numbers don’t point to good things for January existing home sales. This is a leading indicator for those. Both short supply and higher mortgage rates are possible causes for the downtick.

Mortgage Rates

Despite there being quite a bit of movement in the markets day to day as traders try to guess where everything is going to shake out with the economy and the moves of the Fed, when looked at on a week-to-week basis, the numbers are remarkably stable. If you’ve got clients who are looking for guidance, it’s not a bad idea to advise them to lock if they find a house before rates go up.

Last week, the average rate on a 30-year fixed mortgage with 0.8 points paid in fees was flat at 3.55%. This is up from 2.73% a year ago.

Meanwhile, looking at shorter terms, with 0.7 points paid, the average rate on a 15-year fixed mortgage was down a few basis points to 2.77%. This is up from 2.21% last year.

Finally, the current rate for a 5-year treasury-indexed, hybrid adjustable-rate mortgage averaged 2.71% last week with 0.3 points paid, up a single basis point on the week and down from 2.78% at this time a year ago.

With this knowledge, go forth and share with your clients. For even more real estate insight, 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 2022 Econoday, Inc. All rights reserved.

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.