Posts

interest

Mortgage Rates Hit a 20-Year High of 6.92%

According to Freddie Mac, mortgage rates reached a 20-year high last week due to rising interest rates, now at a whopping 6.92%. The Federal Reserve is continuing its aggressive monetary policy to squash surging inflation, sending shockwaves throughout the housing market.

The federal funds rate is projected to reach 4.4% by the end of 2022. Russia’s invasion of Ukraine, supply chain issues and record low interest rates during the pandemic led to unprecedented inflation, prompting the Fed’s policy initiative.

While the Fed continues to wrangle with inflation, the housing market is especially feeling the pinch of higher interest rates. The S&P 500 and the New York Stock Exchange also fell 20% from this time last year as a result of these rate hikes. The declines have continued for several weeks.

Despite the Fed’s efforts, the consumer price index has not significantly budged. The index rose to 8.2% in September, far from the Fed’s eventual target of 2%.

For the last 15 years, mortgage rates in the U.S. have been relatively low. Thirty-year fixed mortgage rates were notably low during the previous two years, hovering between 2.5% and 3.5% between 2020 and early 2022.

However, mortgage rates spiked in recent weeks. As of Oct. 13, the thirty-year mortgage rate is at a two-decade high of 6.92%. The fifteen-year rate is at 6.09%.

Embed from Getty Images

Freddie Mac’s chief economist Sam Khater released a statement regarding the rates.

“Rates resumed their record-setting climb this week, with the 30-year fixed-rate mortgage reaching its highest level since April 2002. We continue to see a tale of two economies in the data: strong job and wage growth are keeping consumers’ balance sheets positive, while lingering inflation, recession fears and housing affordability are driving housing demand down precipitously. The next several months will undoubtedly be important for the economy and the housing market.”

The Fed has been clear about its plan to continue increasing the federal funds rate until prices begin to level out. Mortgage rates tend to rise alongside the federal funds rate.

In September, the chairman of the Fed, Jerome Powell, said there is no way to avoid the rising unemployment and slowing growth that will follow the Fed’s current monetary policy. The consequences of out-of-control interest rates may be even more disastrous for the economy than necessary rising interest rates. The Fed estimates unemployment will climb to 4.4% in 2023 and 2024, up from the current rate of 3.5%.

“We have to get inflation behind us. I wish there were a painless way to do that. There isn’t.”

Some experts are taken aback by how quickly mortgage rates are rising. Economist Matthew Speakman from Zillow told ABC News that “few could have predicted exactly how far and how fast they have risen.”

“There’s not a lot of incentive for rates to come down dramatically in the near-term, but that doesn’t necessarily mean they’re going to keep running away at this pace.”

The relationship between homebuyer behavior and rising mortgage rates is complicated. In general, higher mortgage rates reduce demand, which drives down the prices of homes. Real estate prices are falling, but not as rapidly as expected, in the face of the skyrocketing mortgage rates.

Embed from Getty Images

Daryl Fairweather, an economist at Redfin, spoke on the complexity of the current housing market.

“It’s like a standoff between buyers and sellers. Buyers can’t afford higher prices, and sellers don’t want to sell for lower prices.”

Recession worries, rising inflation and high-interest rates have made things appear bleak, but many experts believe mortgage rates will not continue to skyrocket. Lawrence Yun, the chief economist at the National Association of Realtors, predicts that rates will hover around the resistance point of 7%.

“We don’t want to see a bursting out of that second resistance and going up, because you’re talking about 8.5% mortgage rates, something that we clearly do not want to see. The 7% interest rate could be the new normal.”

In July, Yun released a statement predicting that higher mortgage rates will persist as long as the high inflation rate persists.

“If consumer price inflation continues to rise, then mortgage rates will move higher. Rates will stabilize only when signs of peak inflation appear. If inflation is contained, then mortgage rates may even decline somewhat.”

house

US Home Prices Decline at Fastest Pace Since 2008 Financial Crisis

We are in the middle of the most significant two-month drop in home prices since shortly after the collapse of the Lehman Brothers in September 2008. Prices have been declining at the fastest pace since the Great Recession, prompting some experts to believe we are entering a housing market correction.

house

Homebuilder Sentiment Falls for Ninth Consecutive Month

U.S. homebuilder confidence in the housing market dropped to its lowest level since the beginning of the COVID-19 pandemic. Experts believe the high inflation rate and rising borrowing costs are contributing to first-time homebuyers’ hesitancy to purchase new single-family homes.

The National Association of Home Builders/ Wells Fargo Housing Market Index, which measures the activity of the single-family housing market, fell to 46 in September after declining for the ninth consecutive month. The last nine months are the most prolonged and persistent decline in builder sentiment in the last four decades.

Embed from Getty Images

Experts say a Housing Market Index above 50 shows a healthy market with net positive growth. In November 2020, the index rose to 76, the highest in 35 years, due to the Federal Reserve pushing the federal funds rate to nearly zero. After the pandemic’s dampening effect, the Fed’s loosening of the federal funds rate was meant to stimulate the economy back to health.

Recently The Federal Reserve has been raising interest rates by adopting an aggressive monetary policy to bring the inflation rate back down to sustainable levels. A lack of supply due to construction costs fueled by those interest rates has slowed down building into a housing recession.

NAHB chairman Jerry Konter said builders are responding to a falling market by using incentives to bolster sales, “including mortgage rate buydowns, free amenities and price reductions.”

Pantheon Macroeconomics analyst Ian Shepherdson believes that builder sentiment will continue to decline.

 “This probably will not mark the bottom of the cycle, given the latest surge in mortgage rates above 6%. The rate of fall of mortgage applications slowed over the summer, but the early September numbers point to a renewed sharp decline.”

Mortgage rates have skyrocketed to those seen during the 2008 housing crisis, with interest rates on 30-year fixed loans hitting 6%. According to data released from the Mortgage Bankers Association, mortgage rates have already risen 4% so far this year.

Embed from Getty Images

This increase in mortgage rates would add $389,000 in interest payments to the life of a $500,000 single-family home purchase. The association’s data also showed that the seasonally adjusted MBA Purchase Index rose only 0.2%. New applications for mortgages went down  1.2%.

Though builder sentiment often signals the eventual direction of mortgage applications, NAHB CEO Jerry Howard told Fox Business that people should have confidence that the housing market will pick back up again.

I think you’re seeing a weakening in virtually every market, but those that were stronger are weakening less. I guess the most important thing that investors and people need to remember is that Americans still want to own their homes and that, as soon as the conditions turn a little more favorable, housing will pick up. That will pick up the whole economy.”

labor

US Economy Adds 372,000 Jobs In June, Exceeding Expectations 

According to the monthly jobs report from the Bureau of Labor Statistics (BLS), the US economy added 372,000 new jobs in June, exceeding expectations and providing citizens with a surge in hiring. 

The unemployment rate remained around 3.6% as well. In May, 384,000 new jobs were added, so while June’s numbers were slightly lower, it still exceeded economist’s expectations. Economists initially were expecting around 272,700 jobs to be added in June. 

BLS data shows that the US job market is just 524,000 jobs away from pre-pandemic levels where unemployment rates were reaching record lows. 

Embed from Getty Images

Professional business services, leisure/hospitality sectors, and the healthcare industry saw the biggest gains in jobs, with additional increases in food services and warehouse/storage positions. 

The job market in general has been a major force in keeping the US economy strong. The latest Job Openings and Labor Turnover Survey data released “showed there were 11.3 million available jobs in May, or 1.9 positions for every job seeker, along with historically low levels of layoffs.”

America is currently experiencing the highest inflation rates in 40 years, however, wages continue to rise. Average hourly wages were up by 5.1% within the past year, and the labor participation rate is at a steady 62.2%, just 1.2% less than pre-pandemic levels. 

“The job market is still plowing forward even in the face of increasing headwinds and recession fears. Even if the economy is slowing, the labor market remains a point of strength for the recovery. Strong employer demand is supporting solid but slowing job gains,”  Daniel Zhao, Glassdoor senior economist, said in a statement.

Embed from Getty Images

“The employment report does nothing to dissuade Federal Reserve officials from sticking to their interest rate raising plans, looking to send inflation down, and closer to their 2% target. The next key reading for the Fed is the Consumer Price Index due in the days ahead,” ” said Mark Hamrick, senior economic analyst for Bankrate, in a statement. “

An increase in Covid cases in May prevented a lot of Americans from re-entering the job market last month, making the increase even more unexpected. 

Due to the increase in Covid cases in May, around 610,000 people were unable to look for work in June, up from 455,000 in the previous month. This is the first increase in this sector of data since January when the Omicron variant first appeared in the US.

The most recent Household Pulse Survey from the Census Bureau also showed that “the pandemic took more of a toll on Americans’ ability to work in June. Nearly 3.7 million people said they were not working because they were sick with Covid symptoms or were caring for someone who was sick, according to the survey, taken in the first two weeks of June.”