Home loan rates ticked up to fresh three-year highs as a parade of Federal Reserve officials spoke throughout the week about the need to hike rates more aggressively to combat inflation. Let's walk through what happened this week and talk about the big reports coming next week.
"There is an obvious need to move expeditiously to a more neutral level and more restrictive levels if needed to restore price stability," Fed Chair Jerome Powell - 3.21.22..
This quote, along with several others from Mr. Powell sent the bond prices lower and rates touching three-year highs. It suggested the Fed will need to hike the Fed Funds Rate quickly to get to a more neutral rate, where the Fed Funds Rate neither hurts nor helps the economy. Presently, the Fed Funds Rate is between .25% - .50%.
What would be a neutral rate? Atlanta Fed President Bostic, who was also speaking this week, said the neutral rate is 2.40%. So, this means the Fed wants to hike the Fed Funds Rate by 2.00% or 8 more .25% hikes to get to Bostic's neutral rate.
Mr. Powell also said they could move to more "restrictive levels," which would mean even more rate hikes and a Fed Funds Rate higher than 2.40%.
"Risk is rising. An extended period of high inflation could push longer-term expectations uncomfortably higher." Jerome Powell.
This quote speaks as to why long-term rates have risen so fast of late and why the Fed is speaking so tough this week. The major fear of the Fed is for long-term inflation expectations to rise - meaning, people will expect higher prices in the future. If people expect higher prices, we will see higher prices. This disruption to price stability is exactly what the Fed wants to fight.
Housing Already Seeing the Effect of Higher Rates
New Home Sales for February showed sales of newly built homes decline from a downwardly revised January number. Overall, New Home Sales are down 6.2% from February 2021.
NAHB Chief Economist Robert Dietz said, "New home sales softened in January and February as mortgage rates increased."
A new home sale occurs when a sales contract is signed, or a deposit is accepted. The home doesn't have to be built or even started to be considered a new home sale. Of the 407,000 new homes available for sale only 35,000 are built and ready to be occupied.
The median home price of a new home rose to $400,600, up 10.6% from February 2021, despite a sharp 20% increase in building materials over that time.
It's clear that housing has cooled a bit, which is exactly what the Fed wanted. What remains unclear is if, when, and how much the Fed could hike rates as an interest rate sensitive sector, like housing, has already slowed down.
The tough Fed talk hurt long-term rates like mortgages, this week. It remains to be seen if the Fed can act as tough as they talk. If you, a family member, or a friend is considering a mortgage, now is a great time as rates remain below the rate of inflation ... something that hasn't happened in nearly 50 years.
In addition to Fed speak and the Ukraine/Russia war, the economic calendar is loaded with headline risk events like the Fed's favored gauge of consumer inflation - the Core Personal Expenditure index and next Friday's Jobs Report.
Mortgage-backed security (MBS) prices are what determine home loan rates. The chart below is a five-year view of the Fannie Mae 30-year 3.5% coupon, where currently closed loans are being packaged. As prices move higher, rates move lower and vice versa.
You can see that prices are at levels last seen in May 2019 - meaning, the highest mortgage rates since then. What you can also see is the big price appreciation and mortgage rate improvement in December 2018, when the Fed hiked rates a fourth time that year.
The material contained in this newsletter has been prepared by an independent third-party provider. The content is provided for use by real estate, financial services and other professionals only and is not intended for consumer distribution. The material provided is for informational and educational purposes only and should not be construed as investment and/or mortgage advice. Although the material is deemed to be accurate and reliable, there is no guarantee it is without errors.
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