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Interest Rate Ups And Downs – Real Estate Market Update

Kevin Graham6 minute-read
December 09, 2021


Up to this point, the housing market has been toastier than the fireplace at your holiday gatherings. The question is whether the Federal Reserve will blow on the hot chocolate by raising interest rates. And how does omicron play into all this?

The Big Story

We’ve got a little bit of a tug-of-war happening in the minds of bond traders right now. On one hand, the Federal Reserve has signaled plans to back up their bond-buying plans, potentially at an even faster pace. There is also talk of a hike in short-term interest rates even faster than initially planned.

A major problem for the Fed right now is inflation. It’s gotten bad enough that in testimony before Congress, Chairman Jerome Powell has had to admit that the problem may not be as temporary as once thought.

The way the Fed plans to combat that is twofold: They’ve already started backing off their activity in the bond market, including slowing their purchases of agency mortgage-backed securities. This has the effect of pushing rates up because they have to make rates of return higher on the bonds in order to attract a buyer. As bond yields go up, so do rates.

The other way to control inflation involves raising short-term interest rates. The Federal Reserve controls the Fed funds rate, which is the rate at which banks borrow money from each other overnight. Essentially, the more banks have to pay to borrow money, the more you’re likely to pay as a consumer. If it’s not as cheap to borrow money, it makes the money already in circulation worth more, decreasing inflation pressures.

While the Fed hasn’t wanted to raise interest rates with the economy still recovering from the pandemic, persistent inflation could force them to speed up their plans.

On the other side is omicron. If the new COVID-19 variant forces a slowdown in the economic recovery, people are more likely to invest in bonds because it’s considered a safer investment based on a guaranteed return.

All of this has caused a crazy amount of volatility over the past few weeks as rates have seesawed back and forth. It’s also important to note that many movements tend to increase around the holidays because there’s less volume being traded so there can be bigger price swings. Traders around this time also tend to be more junior, so they may be prone to overreacting to news one way or the other.

If your clients see a rate they like this time of year, encourage them to lock it in. You never know where rates might go next.

More News You Can Use

As always, this portion of the report is aided by analysis from our friends at Econoday.1 Let’s get into it!

Consumer Price Index (CPI)

Inflation on the consumer side was up 0.9% overall in October and 6.2% on the year. When food and energy were excluded from the calculations, prices rose 0.6% and 4.6% since last October.

In terms of housing, the cost of shelter was up quite a bit, rising 0.5% in October. It took a while for the rising home prices and rental amounts to show up in this particular index, but it appears to have finally happened.

Retail Sales

Taking a look at overall retail sales numbers, they’re up 1.7% for the month of October, a number matched when excluding vehicles. When taking out both cars and gas, sales were up 1.4%.

In the categories related to home, sales in building material and garden equipment supply stores were up 2.8%. Sales of furniture and home furnishings rose 0.4%.

Housing Market Index

This measure of sentiment put out by the National Association of Home Builders was up 3 points in November to 83, matching its highest level since May. There were real increases in traffic of potential buyers walking through homes along with good feelings from builders about the present level of sales.

New Residential Construction

The number of housing completions in October was relatively flat at a seasonally adjusted annual rate of 1.242 million. This number is 8.4% lower than last year. Single-family completions were down 1.7% to an annual rate of 929,000, while multifamily completions in buildings with 5 or more units were on pace to hit 302,000.

Meanwhile, starts in October were down 0.7% to an annual rate of 1.52 million. The good news is that it’s 0.4% above the rate for October last year. Single-family starts were down 3.9% at 1.039 million, while multifamily starts were pacing for 470,000.

Finally, although permits are furthest off from actual housing, there were some positive trends, as these were up 4% to a seasonally adjusted annual rate of 1.65 million in October. Single-family authorizations were up 2.7% to 1.069 million, while there were 528,000 permits pulled for multifamily construction.

Existing Home Sales

In October, sales of previously owned homes were up 0.8% at 6.34 million on an annual basis. This is 5.8% lower than the same time a year ago, but as we all know, 2020 was crazy. Single-family home sales specifically were also up 1.3% to 5.66 million annually. Multifamily sales were down 0.8% at 680,000 in October on an annual basis.

Homes are spending very little time on the market, at 18 days. The median cost of a home was up 0.8% at $353,900. It’s a very tight market in terms of supply, at 2.4 months given the current pace of sales.

Gross Domestic Product (GDP)

In the second estimate of economic growth for the third quarter, the pace increased to 2.1% from 2% and personal consumption expenditures were also up 0.1% to 1.7%. Unfortunately for readers of this report, residential investment was down 8.3% last quarter.

New Home Sales

New home sales were up 0.4% to an annual rate of 745,000 in October. The bad news is that sales in September were heavily revised down from 800,000. With that said, there is much more supply in the market for new homes than existing ones, at 6.3 months.

The median sales price was up 0.7% to $407,700. However, there may be room to drop that in the future as sales have decreased 23.1% since last year, even when you think about how crazy the 2020 market at this time was.

Pending Home Sales Index

The number of homes under contract for sale increased by 7.5% in October to come in at an index level of 125.2. This is a good sign for existing home sales reported in November.

Case-Shiller Home Price Index

The Case-Shiller HPI looks at all home purchases within 20 cities that represent major metropolitan areas. It’s a rolling 3-month average.

On a seasonally adjusted basis, home prices were up 1%. Taking out the adjustment, they were up 0.8% overall in September and 19.1% since last September. Although the pace of annual appreciation slowed slightly, it remains an incredibly hot market.

FHFA House Price Index

Unlike the Case-Shiller Index, the FHFA index for home prices looks only at purchases backed by conventional mortgages. It’s also based on true month-to-month changes rather than any average.

That said, home prices were up 0.9% in September and 17.7% over the course of the year. As with its counterpart, price growth has slowed, but it still shows a very competitive market.

Mortgage Rates

As mentioned before, rates have been all over the place during the week despite week-to-week numbers showing not as much volatility. If clients are on the fence, but like what they see, you can never go wrong by locking your rate to protect yourself from future upward movement.

The average rate on a 30-year fixed mortgage was up a single basis point to 3.11% with 0.6 points paid in fees. This is up from 2.71% last year.

Looking at shorter terms, the average rate on a 15-year fixed was down a few basis points to 2.39% with the same number of points paid last week. This is still up from 2.26% last year.

Finally, the average rate on a 5-year treasury-indexed, hybrid adjustable-rate mortgage with 0.3 points paid was up a couple basis points to 2.49%. This has fallen from 2.86% last year.

Now that you have this info, share with your clients to position yourself as an expert in their transaction. For even more insights, check out our other real estate agent tips.

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.

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.