Mortgage Rates Stabilize Amidst Fed Pressure – Real Estate Market Update

The Federal Reserve (Fed) has been talking tough, pointing to continually higher targets for the federal funds rate to try and combat inflation. The thing is that the markets aren’t really following suit.

All eyes are on price control at the Fed, with two branch presidents calling for the target for the federal funds rate to remain above 5% indefinitely until inflation is brought under the central bank’s boot. As a reminder, the target for inflation is 2% annually. Based on the Fed’s preferred metric, current inflation is sitting at 4.7%.

To that end, they’ve been continually raising the target range for the federal funds rate, the rate at which banks borrow from each other overnight. The target has gone up seven times since the beginning of 2022 and currently sits in a range of 4.25% – 4.5%. In theory, when this goes up, the cost is passed through to consumers.

However, that’s not happening right now in the mortgage market. It gets complicated, but mortgage rates are much more based on demand for mortgage-backed securities. They also tend to track fairly closely with the yield on the 10-year Treasury. Mortgage rates have stabilized quite a bit.

While slightly higher this past week, they’ve come down from a high point and over the past 4 weeks, the 30-year fixed has settled in the low-to-mid-6% range after getting as high as 7.08% a couple of months ago, according to Freddie Mac.

At the same time, there is evidence of relief for home buyers in the form of falling prices. Even accounting for seasonal adjustment, prices were down 0.5%, according to the Case-Shiller index for October across the top 20 metropolitan cities. Prices are still up 8.6% from last year at the same time, but that’s a far cry from the 10.4% uptick in September.

It may not be the best market for buyers, but it could be a lot worse. If you’ve got a client that is ready to buy now, don’t discourage them from moving forward. They can always refinance later, potentially with lower closing costs through Rate Drop Advantage.

Additionally, they can take advantage of our Inflation Buster to get a temporary buydown of 1% for the first year of their term, which could enable them to save upfront. After that, who knows where rates will be a year from now, but it buys them time with a lower payment while still having the certainty of a fixed rate.^1,2

As usual, this section of the report is supplemented by analysis from our friends at Econoday.³

• Consumer Price Index (CPI)
• Retail Sales
• Housing Market Index
• New Residential Construction
• Consumer Confidence
• Existing Home Sales
• Gross Domestic Product (GDP)
• New Home Sales
• Case-Shiller Home Price Index
• Federal Housing Finance Agency (FHFA) House Price Index
• Pending Home Sales Index

Consumer Price Index (CPI)

Prices overall were up 0.1% in November in this index that’s a counterpart to the Fed’s preferred Personal Consumption Expenditures Index. They’ve gone up 7.1% on the year. When food and energy were taken out, they’ve gone up 0.2% and 6% for the year.

Taking a look at the category that matters most in real estate, shelter was up 0.6% and 7.1% annually.

Retail Sales

Retail sales had a disappointing month of November, down 0.6%, including a fall of 0.2% when taking out vehicles and the same 0.2% drop when further removing gas.

In sectors associated with housing, building material stores saw a sales drop of 2.5%. At the same time, furniture sales were down 2.6%.

Housing Market Index 

Builders remain hesitant when you ask them about the outlook for the housing market. Overall confidence in this index was down 2 points at 31 in December. The present sales component was down 3 points to 36, which is the lowest it’s been since July 2012, excluding the very beginning of the pandemic.

In a better sign, expected sales over the next 6 months were up 4 points at 35 in December. However, traffic of prospective buyers walking through homes remained at 20. Not many people doing walk-throughs amid the cold weather and higher rates. 

New Residential Construction

Completed construction was up 10.8% in November to a seasonally adjusted annual rate of 1.49 million, 6% higher than the same time a year ago. Single-family completions were up 9.5% to 1.047 million. Meanwhile, there were 430,000 completions in buildings with 5 units or more.

Turning to starts, the number of shovels put in the ground in November was down 0.5% at 1.427 million on a seasonally adjusted annual basis. This has fallen 16.4% from last year. Meanwhile, single-family starts were down 4.1% at 828,000. Finally, there were 584,000 multifamily units.

Building permits fell 11.2% from October to come in at 1.342 million. This is 22.4% lower than November of last year. On the single-family side, permits were down 7.1% at 781,000 to go along with 509,000 multifamily unit authorizations. 

Consumer Confidence 

In December, overall consumer confidence was up 6.9 points at 108.3. However, plans to buy houses and appliances both fell, for what it’s worth. However, inflation expectations are also lower. Lower expectations could lead to lower prices in the future, which would be good for housing.

Existing Home Sales

Existing home sales were down 7.7% to 4.09 million on a seasonally adjusted annual basis in November. They’re down 35.4% compared to the same time a year ago. Breaking that down, single-family home resales were down 7.6% at 3.65 million units. On the multifamily side, they fell 8.3% at 440,000 units.

Supply in the market is still extremely tight at 3.3 months relative to the current pace of sales. Meanwhile, the median price was down 2.1% at $370,700, which is 3.5% higher than a year ago, but a far cry from the astronomical pace of price increases earlier this year. 

Gross Domestic Product (GDP) 

Overall growth in the economy was 3.2% in the final reading of the third quarter. This included a 2.3% annual increase in personal consumption expenditures. On the downside, housing was a drag on the top line numbers. Residential investment fell 27.1% in the quarter.

New Home Sales

New home sales ended up 5.8% at 640,000 on a seasonally adjusted annual basis in November. While this is still down 15.3% from last year, it’s a step in the right direction. Supply in the market is much better in the market for new homes, at 8.6 months given the current pace of sales.

Of course, that doesn’t mean buyers will necessarily find the homes they want. In particular, there are fewer starter homes. Houses priced under $300,000 make up just 7% of the November sales. The median price of a new home did go down 2.8% to $471,200, still up 9.8% from last year.

Case-Shiller Home Price Index 

In this index, which is a rolling 3-month average of the final price of home sales across 20 major metropolitan cities, prices were down 0.5% on a seasonally adjusted basis in October. They fell 0.8% overall, but they’ve still risen 8.6% on the year. 

Federal Housing Finance Agency (FHFA) House Price Index

The FHFA index only looks at purchases backed by conventional loans, and it’s not a 3-month average, so that may explain some of the disparity between the two indices. In October, house prices in this index were flat, having gone up 9.8% since last year at the same time.

Pending Home Sales Index 

Because pending sales are sales of existing homes under contract to close within the next month or two, this is a leading indicator for the existing home sales numbers. Therefore, the fact that this is down 4% in November, the sixth consecutive decline, doesn’t bode well. The index is down 37.8% for the year at 73.9.

Overall mortgage rates were up just slightly last week. The Federal Reserve has signaled that it’s committed to bringing inflation down through increases to the target for the federal funds rate, which generally pushes all consumer rates up. As we’ve seen though, mortgage rates are somewhat marching to the beat of their own drummer.

If you’re looking to put a fine point on this for clients, encourage them to move forward if they’re ready. Let them know if they maintain good financial habits, they should be able to refinance if rates fall in the future.

Last week, the average rate on a 30-year fixed according to Freddie Mac was up 6 basis points to 6.48%. This has gone up from 3.22% last year at the same time.

Turning to the shorter terms, the average rate on a 15-year fixed was up 5 basis points at 5.73%. This is up from 2.43% a year ago.

Now that you have the information, use it to help your clients make confident home buying decisions. Have a great month!

¹ If client locks their initial rate on a purchase loan between 9/15/22 and 3/30/23 client’s loan is eligible for the promotional Inflation Buster offer. The promotional offer will effectively reduce the rate by 1% for the first year of the mortgage; a custodial escrow account will be funded by the lender-paid credit, up to a maximum amount of $9,708, and funds will be dispersed from the escrow account to the investor to account for the difference in interest during buydown period. Offer valid only on primary residences and second homes through Fannie Mae and Freddie Mac. Offer not valid on non-agency Jumbo Loans, Interest Only loans, 2nd lien products, bank statement loans, and manufactured homes. Offer only valid on 15, 20 and 30 year fixed-rate conventional conforming and government purchase loans in retail channels. Offer may not be redeemed for cash or credit and is nontransferable. Offer cannot be retroactively applied to any loans and may not be used with any other discounts or promotions. This offer is subject to changes or cancellation at any time at the sole discretion of Rocket Mortgage. Additional restrictions/conditions may apply. This is not a commitment to lend and is contingent on qualification per full underwriting guidelines.

² If client locks their initial rate on a purchase loan between 7/19/22 and 3/30/23 and that loan closes, client is eligible for Rate Drop Advantage. Refinance offer must be claimed by locking initial rate between 120 days and 36 months from purchase closing date. Refinance loan must be on the same subject property as the original purchase loan. Rocket Mortgage will cover the following fees as a lender paid credit: first appraisal fees, credit report, tax certification, mortgage recording fee, flood certification and life of loan, notary fees in Pennsylvania and New York, and if a conventional loan, processing and underwriting fees. Rate Drop Advantage is only valid on conventional conforming and government loans in our retail channels. Offer may not be redeemed for cash or credit and is nontransferable. Offer cannot be retroactively applied to any loans. Offer may not be used with any other discounts, promotions or interest-only/buy-down and second lien products. This offer is subject to changes or cancellation at any time at the sole discretion of Rocket Mortgage. Additional restrictions/conditions may apply. This is not a commitment to lend and is contingent on qualification per full underwriting guidelines.

³ 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 2023 Econoday, Inc. All rights reserved.