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Rising Rates Could Cause Action – Real Estate Market Update

Kevin Graham7 minute-read
January 05, 2022

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I hope everyone had a good holiday. It feels like there’s barely any break because people start thinking about how to handle future home purchases right at the beginning of the year. While that’s been true for a while, let’s get into why changing conditions in particular present a bigger opportunity for this year.

The Big Story

At the conclusion of its last meeting December 14 – 15, the Federal Open Market Committee (FOMC) of the Federal Reserve decided to increase the pace of its pull back on asset purchases in the bond market.

Of specific concern to those of us who work in real estate is an additional decrease of $10 billion per month in the number of mortgage-backed securities (MBS) purchased by the central bank. For a while now, the Fed has represented the biggest player in the MBS market because it wanted to keep mortgage rates low to give the economy a boost.

With employment on the rise and the economy recovering from the pandemic, it seems like that boost has had the desired effect. However, with inflation rising, the Fed has been evaluating when and how fast to pump the brakes.

In the absence of buyers coming into the bond market, it’s important to realize that rates are likely to rise over time from their current levels until the Fed completes its action and the market finds a new balance point.

In addition to this, the central tendency in the projection for the federal funds rate, the rate at which banks borrow money overnight, is expected to be between 0.6% – 0.9%. Given that this rate is currently 0% – 0.25%, this could mean two or even three increases in the next year.

Although longer-term rates for things like a 30-year fixed mortgage aren’t tied to this short-term rate, they tend to follow the same general path over time. Between a controlled withdrawal from the MBS market and projected increases in the fed funds rate, mortgage rates are likely to rise in the near future.

However, as a real estate agent, there are two important things to remember: Even if rates get to the 5% range eventually, this would still be very cheap financing in the context of history. According to data going back to 1971 from Freddie Mac, rates got as high as 18.63%, and that was only if you paid more than 2 mortgage points at closing.

In addition to being in a relatively client-friendly interest rate market, the other thing to know is that the threat of higher interest rates can spur someone to action. As long as they are financially stable and ready to buy a home, many are more inclined to buy now than wait for higher rates in the future. That’s an opportunity for you.

More News You Can Use

As always, this report is supplemented with analysis by our friends at Econoday.1 Let’s get to it!

Consumer Price Index (CPI)

Overall consumer prices were up 0.8% in November and have risen 6.8% on the year. When food and energy were taken out, these prices were up 0.5% on the month and 4.9% on the year.

What we really care about in the real estate space is the shelter cost, and this was up 0.5%. Increasing home costs took a while to show up in this metric, but they’re finally here.

Retail Sales

Overall retail sales in November were up 0.3%, a number that was matched when excluding vehicles. When gas was further removed, sales were up 0.2%.

In terms of industries related to housing, sales in furniture and home furnishing stores were flat in November. Meanwhile, sales at building material and garden equipment suppliers were up 0.7%.

Housing Market Index

Sentiment among homebuilders was up a point to 84 in December. This is extremely strong.

The current sales metric was up to 90 from 89. Meanwhile, forecasts of future sales over the next 6 months remained flat at 84. The amount of traffic of prospective buyers was up a single point to 70. Being that the traffic number was in the 40s for quite a while, 70 is phenomenal.

New Residential Construction

There was a 4.1% increase in the number of housing completions in November with the seasonally adjusted annual rate now at 1.282 million. On the single-family side that has most of the inventory, completions were down 0.1% to 910,000 annually, but there was a pickup in multifamily completions at 364,000.

There was really good news in terms of shovels in the ground. November saw an 11.8% uptick for housing starts to an annual rate of 1.679 million. On the single-family side, they were up 11.3%, while there were 491,000 multifamily starts.

Building permits were up 3.6% to 1.653 million. Although these are furthest out from actual homes, it’s nevertheless a good sign for future plans. Single-family permits were up 2.7% at 1.074 million on a seasonally adjusted annual basis. Meanwhile, there were 560,000 multifamily construction authorizations.

Gross Domestic Product (GDP)

In the final reading of the third quarter, economic growth as measured by GDP was up 2.3%. Better yet, personal consumption expenditures were revised up 0.3% to 2%.

Residential investment was still down for the quarter, but only by 7.7%. This is better than the 11.7% decline previously estimated.

Consumer Confidence

Consumer confidence was up 3.9 points in December to come in at 115.8. There are some positive trends to report as well. November numbers were revised up by more than 2 points. Even better, people expecting to buy homes and major appliances over the next 6 months increased, according to the report.

Existing Home Sales

Existing home sales were up 1.9% in November coming in at a seasonally adjusted annual rate of 6.46 million. Although this is down 2% from the bonkers real estate market that we saw at this time in 2020, it’s still a very robust number.

If there’s a downside, it’s that increased sales came of the cost of low inventory, which is down 13.3% to 1.11 million units. At the current pace of sales, that means there is just a supply of 2.1 months on the market, the lowest level since last March.

The median price of an existing home was up only 0.3% to $353,900, less than might be expected with supply this tight. Breaking things down a bit, sales of single-family homes were up 1.6% to 5.75 million units. Meanwhile, multifamily sales rose 4.4% at 710,000 units on an annual basis. First-time home buyers made up 26% of those who bought in November.

New Home Sales

New home sales in November were up 12.4% at 744,000 annually. This is 14% lower than last November, but see previous note on 2020.

The median sale price was up 2% to come in at $416,900 in November, which is 18.8% higher than a year ago. The good news is that the amount of supply coming on the market continues to rise, up to 7.1 months compared to 6.5 months in October. Buyers waiting for prices to moderate may be able to take heart in that.

Case-Shiller Home Price Index

Signs are pointing to home prices going up, but the pace of appreciation might be moderating a bit. The Case-Shiller index is a rolling 3-month average of all home purchase transactions across 20 major metropolitan cities.

According to data for October, prices were up 0.9% on a seasonally adjusted basis and 0.8% overall. On an unadjusted basis, the annual rate of appreciation is at 18.4%. While still quite high, this is down from 19.1% and has been dropping a bit the last couple of months.

FHFA House Price Index

Released at the same time as the Case-Shiller index, this data is only covering home sales backed by conventional loans. However, it’s a month-to-month metric as opposed to a rolling average, so it’s a more immediate snapshot.

This index shows that in October home prices were up 1.1% and they’ve risen 17.5% since last October. Although the pace of appreciation is a bit down from the Case-Shiller index, the numbers tell a similar story.

Pending Home Sales Index

In a release that’s probably not good for December existing home sales, the number of homes under contract for sale in November dipped 2.2% to an index level of 122.4. However, it’s noted that the number is still relatively high.

Mortgage Rates

Mortgage rates picked up a bit across the board to end 2021. However, they still remain at relatively low levels. We talked earlier about all the reasons rates probably won’t stay this way indefinitely. If your client likes a rate they see, encourage them to take advantage of locking the rate if they’ve found a house.

According to Freddie Mac, the average rate on a 30-year fixed mortgage with 20% down and 0.7 points paid in fees was 3.11% last week, up 6 basis points. This has risen from 2.67% last year.

Meanwhile, looking at a 15-year term with the same down payment and points paid, the rate was up 3 basis points to settle at 2.33%, up from 2.17% last year at the same time.

Finally, the average rate on a 5-year treasury-indexed, hybrid adjustable-rate mortgage with the same down payment and 0.5 points paid was up 4 basis points to 2.41%, which has fallen from 2.71% last year.

With this information, go dazzle your clients with your expertise. For even more resources, check out the other articles on 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.

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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.