Mortgage applications are dropping as rates go up
Inflation and the Fed: Making Sense of the First Three Months of the Year (It Happened Before the Bell)
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Markets plunged on Thursday morning, after the Federal Reserve raised fears that it would continue hiking interest rates aggressively. Then, something strange happened.
The stock market staged a huge comeback. The Dow Jones Industrial Average surged 1,500 points from peak to trough and the S&P 500 posted its widest trading range since March 2020, ending the day up more than 2%.
Consumers are spending more and rates are increasing, which is showing signs of resilience. Overall housing costs are increasing as well as impacting inflation.
“While the Fed signaled that it will continue to raise rates this year, the moves are expected to come in 25 basis point increments, a less aggressive tightening than what we saw in 2022,” said Ratiu. “The central bank is acknowledging that it sees its monetary actions having a tangible effect on inflation. The data on the Consumer Price Index out this week appears to confirm the views of the bank.
What causes the sharp divergence between markets and inflation data? Investors could be betting that the stronger-than-expected inflation report means price increases are near their peak. The market illustrates how investors want to know what the Fed will do next.
The Big Picture: Reducing Household Wealth During the Financial Crisis and the 2022 US Retail Sales Turns Head Toward a Statistically Better Future
The big picture: Household wealth is on track for its first significant reduction since the financial crisis in 2008, according to a new report by financial services company Allianz.
Global assets are projected to decline by 2% in 2022, according to the report. That means households, on average, will lose about a tenth of their wealth this year.
The report paints a bleak picture. The financial crisis was a relatively quick recovery, but the outlook shows stagnant growth in the future. The last three years have seen an increase in the growth of financial assets.
Russia’s war on Ukraine has hampered the potential for a post-pandemic economic recovery and will cause food and energy shortages. Inflation is rampant and central banks around the world are raising borrowing costs. Stock markets are likely to end the year in the red– 2021 “might have been the last year of the old ‘new normal’, with low interest rates and bullish stock markets,” wrote Allianz researchers.
In the spring of 2021 disposable income fell as inflation outran wage growth and savings dried up. While American bank accounts are still fairly robust, consumers are borrowing more. Credit card balances increased in the third quarter. That’s the largest annual jump since the New York Fed began tracking the data in 2004.
The takeaway: Allianz calls these changes a “tectonic shift” in global wealth that will take years to recover from. The retail sales for September in the US will probably shed light on the state of the consumer, along with earnings reports from some of the country’s largest banks.
A Tale of Two Economys in Freddie Mac’s Mortgage Market: The U.S. Real Estate Market Has Come Into It’s End
The 30-year mortgage averaged 6.42% in the week ended March 23, down from 6.60 the week before, according to data from Freddie Mac. The 30-year fixed-rate was at it’s peak a year ago.
As well as putting off new buyers, the sharp increase in rates has shocked existing homeowners accustomed to more than a decade of ultra-low borrowing costs.
Freddie Mac’s chief economist said there was a tale of two economies in the data. Strong job and wage growth is keeping consumers’ balance sheets positive while recession fears and housing affordability are driving housing demand down.
Doing the math: A year ago, a buyer who put 20% down on a $390,000 home and financed the rest with a 30-year, fixed-rate mortgage at an average interest rate of 3.05% had a monthly mortgage payment of $1,324, according to calculations from Freddie Mac.
Last year was a wild ride in the US housing market. The longest sales slump on record occurred after mortgage rates doubled. A lot of would-be buyers and sellers watched from the sidelines.
Much of what is available with the current $9.99 a month Basic plan will be available in the new option, but will include an average of four to five minutes of commercials per hour. The ads will be 15 or 30 seconds in length and will run before and during some shows and movies.
The Case for Mortgage Rates to Fall in the 21st Year in a Row, After the Stock Tumble, Netflix Appeared to Goldman Sachs
Following that news, the stock tumbled, and the company lost billions in market cap. Hundreds of employees were laid off, and doubts persisted about the platform’s viability, raising questions about the future of the streaming marketplace.
▸ Third quarter earnings from Bank of America
(BAC), Goldman Sachs
(GS), Johnson & Johnson
(JNJ), United Airlines
(UAL), American Airlines
(AAL), Tesla
(TSLA), AT&T
(T), Verizon
(VZ) and Netflix
(NFLX).
Mortgage rates decreased for the second week in a row because of ongoing concerns about bank failures and uncertainties in the financial markets.
For the Fed to reach its desired target of 2% inflation, jobs will have to take a hit, with unemployment rising to about 4.6% this year, according to the central bank’s projections released in December. The central bank will likely continue to put pressure on the economy by instituting painful rate hikes until we get there.
“Homebuyers are waiting for rates to decrease more significantly, and when they do, a strong job market and a large demographic tailwind of Millennial renters will provide support to the purchase market,” said Khater. “Moreover, if rates continue to decline, borrowers who purchased in the last year will have opportunities to refinance into lower rates.”
Freddie Mac said mortgage application activity fell to a quarter-century low this week as high mortgage rates continue to weaken the housing market. “While mortgage market activity has significantly shrunk over the last year, inflationary pressures are easing and should lead to lower mortgage rates in 2023.”
The amount of Purchase applications dropped to their lowest level since the beginning of this year and were more than 40% lower than they were a year ago. “Potential buyers remain quite sensitive to the current level of mortgage rates, which are more than two percentage points above last year’s levels and have significantly reduced buyers’ purchasing power.”
NAR anticipates the economy will continue to add jobs throughout this year and next, with the 30-year fixed mortgage rate steadily dropping to an average of 6.1% in 2023 and 5.4% in 2024.
The Financial Bubble Revisited: The Real Estate Market’s Prescription After the 2008 Housing Bubble Reopened in May 2021 and Mortgage Rates Spike Back
Editor’s Note: Erik Lundh is a principal economist at The Conference Board. The opinions are of his own. CNN has more opinion.
The housing Bubble in the 2000s was underpinned by predatory lending, poor underwriting and rampant speculation. Americans believed that housing was a great way to make money in the short term and that prices would continue to rise. This was not the case.
Additionally, in the years that followed the 2008 financial crisis, new regulations were introduced. Banks are now required to be better capitalized; lending standards are much more rigorous, leading to higher-quality loans; most mortgages are fixed-rate; and financial derivatives, such as asset-backed securities, are better regulated. The financial system’s survival is dependent upon another housing downturn.
Mortgage rates fell throughout January, prompting more buyers to view properties and make offers. Consumer confidence has been boosted by the easing of inflation. Homebuilders’ confidence increased in January, despite the improvement in pending home sales in December.
Americans have more equity in their homes than they did before the last financial crisis. The loan-to-value ratio, which takes the value of a home as a baseline, has fallen to 42%, the lowest it has been in 12 years. It creates more of a cushion for prices to fall before the loans that underpin the home values are paid back. Thus, if a home is sold at a loss, it’ll likely hit homeowners before it hits the banks.
The houses were leaving the agency, according to Grant, the manager. “There were chin-dropping moments when agents stand around the room and are gobsmacked at the prices being achieved,” he told CNN Business.
The property sold for 600,000 New Zealand dollars, or $510,000, in an eight minute auction, more than double the asking price. (Most homes in New Zealand are sold at auction.)
In May 2021, the sales attracted many bids, which drove the prices even higher. According to Sykes, the clearance rate at Barfoot & Thompson has fallen since then, prolonging sales and sending prices lower.
“The home price data released today do not account for the full impact of rising mortgage rates, which were above 7% early in November, and led to a significant pullback in buyer activity,” she said. Many local markets across the country have seen home prices plummet from their summer peaks as buyers were forced out due to affordability challenges.
Rising interest rates are driving the dramatic change. Central banks on a warpath against inflation have taken rates to levels not seen for more than a decade, with ripple effects on the cost of borrowing.
Oxford Economics shows that a spike in joblessness raises the number of forced sellers in a downturn and that is what happened in past house price crashes.
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Most markets are now seeing falling prices because of the data lags. “We’re in the early period in quite a clear downturn now and the only real question is how steep and how long it’s going to be.”
Official figures show prices for new homes in China plummeted in October, the fastest pace in over seven years, as the country’s sputtering economy is hammered by a weakness in the property market. According to China Index Academy, home sales have fallen this year.
As banks are more cautious with their lending, sales are sliding elsewhere, while people wait for a better economic outlook.
“New listings were at the lowest level in the last six years in January as sellers stayed on the sidelines, waiting to see buyers return, before placing their homes for sale,” said Jones. The first month of the year brought some hope because the year-over-year declines in both existing and new home sales slowed.
Mortgage rates in 25 major cities around the world tracked by UBS have almost doubled on average since last year, making house purchases much less affordable.
“A skilled service sector worker can afford roughly one-third less housing space than before the pandemic,” according to the UBS Global Real Estate Bubble Index.
In Britain, more than 4 million mortgages have been issued to first-time buyers since 2009, when rates were near zero. Tom Bill, head of UK residential research at broker Knight Frank said that a lot of people don’t appreciate what it’s like when their monthly outgoings rise.
It is possible that an evidence shift of spillovers from the economy or inflation will cause mortgage rates to go up.
But even in places where a large proportion of mortgages are fixed, such as New Zealand and the United Kingdom, the average maturity of these mortgages is quite short.
Emerging Labor Markets and the ILO Report on China’s Construction and Employment Problem in the Early Post-Pendulum Economic Era
The amount of debt subject to higher rates over the next year is more than first thought, according to a report last month.
“History shows that if labor markets can remain strong, then the chances of a more benign correction are higher,” according to Innes McFee, chief global economist at Oxford Economics.
Employment levels in advanced economies have recovered since the beginning of the Pandemic. But there are early signs that labor markets are starting to cool as weak economic growth hits demand for workers.
The number of hours worked in the third quarter was 1.5% less than the second quarter, which meant that a deficit of 40 million jobs was created.
In its October report, the ILO said that the outlook for global labour markets has deteriorated in recent months and that job vacancies will decline and global employment growth will weaken in the last quarter of 2020.
Most market watchers are not expecting a repeat of the 2008 housing market crash. Some countries have housing supply that is tight and banks in better financial shape.
Oxford Economics expects world GDP to expand by less than expected in the future, particularly if house prices plunge more than expected and residential investment is hit with a lending squeeze.
“An additional negative factor, compared to the [global financial crisis], is that the Chinese housing market is also in a downturn,” according to Slater. “So rather than offsetting the impact on world output of a global housing downturn, as was the case after the GFC, the Chinese housing sector is contributing to the slump.”
Mortgage Rates and Mortgage Applications: Predictions from the Cooling in November, a Study by the Consumer Price Index (CPI)
Inflation, as measured by the Consumer Price Index, cooled considerably in November and was at its lowest level in nearly a year, according to the Bureau of Labor Statistics’ closely watched index, released on Tuesday.
The average mortgage rate is based on mortgage applications that Freddie Mac receives from thousands of lenders across the country. The survey includes only borrowers who put 20% down and have excellent credit. Many buyers who put down less money upfront or have less-than-perfect credit will pay more than the average rate.
Mortgage rates rose this week after four weeks of declines, as a stronger-than-expected jobs report suggested the Federal Reserve would continue hiking its benchmark lending rate in its battle against inflation.
The central bank remains committed to rate hikes until the pace of inflation slows, and more rate increases are needed, since prices are still rising at a high rate, according to Fed Chair Powell.
Ratiu said that the cooling in inflation measures should make it easier for the mortgage rates to go up.
“With more homes available for sale, and more of them sporting price cuts, some buyers are running the math and finding that the slide in rates is offering better options within their budgets,” said Ratiu.
The data showed that applications for a mortgage fell for the third week in a row and are now at a 28-year low.
“Purchase activity that was put on hold last year due to the quick runup in rates is gradually coming back as rates ease and housing demand remains strong, driven by supportive demographics and the ongoing strength in the job market,” said Joel Kan, MBA’s vice president and deputy chief economist.
A long list of housing data is on tap. On Tuesday the US Census Bureau will report housing starts and building permits figures for November, followed by Friday’s release of new home sales data for the same month. In between that will be the November existing home sales numbers from the National Association of Realtors on Wednesday, as well as weekly data on mortgage rates and applications on Thursday.
Still, there are some promising signs that the worst could soon be over. Shares of Lennar
(LEN), one of the largest homebuilders in the US, rallied after reporting earnings last week. Revenue topped forecasts and the company’s guidance for the number of homes it expected to deliver next year was a little higher than analysts’ estimates as well.
Lennar investors “may be looking ahead to 2023, perhaps crossing the valley from recession to potential recovery,” according to CFRA Research analyst Kenneth Leon.
The recent slide in prices is relevant to the investment firm which buys single-family homes to rent out.
It’s also worth noting that the job market is still strong and wages are growing. Many consumers still have excess savings thanks to the GovernmentStimulus.
Others point out that even though housing sales may remain weak due to high home prices and still elevated mortgage rates, the good news is that most existing homeowners are still paying their monthly mortgage on time.
Again, that’s a stark contrast from 2008 when many people with subprime loans or borrowers with poor credit histories were unable to keep up with their mortgage payments.
Predictions of the Next Three Months: The Health of the Consumer, The State of Corporate Spending, and the Outlook of General Mills
There aren’t a ton of companies reporting their latest earnings this week. More information about the health of consumers and the state of corporate spending can be found in the few that are.
General Mills earnings will be released on Tuesday. Analysts are expecting an increase in profit. Consumers may be growing increasingly wary about inflation and the broader economy, but they’re still eating their Wheaties. Shares of General Mills
(GIS) have soared nearly 30% this year.
Analysts don’t see a lot of upside in the outlook for the sneaker king Nike, used car retailer CarMax, and memory chip maker Micron which produce chips that are used in cell phones and computers.
The fourth-quarter earnings of the S&P 500 are expected to fall 2.8% from a year ago. Analysts have been busy cutting their forecasts too. In a September 30 report, John Butters stated that the fourth-quarter profits would rise 3.7%.
“Odds of a recession are pretty high,” said Vincent Reinhart, chief economist and macro strategist at Dreyfus & Mellon. That will have a negative effect on corporate earnings. Higher rates and lower earnings may hurt the stock market.
The US existing home sales, Germany consumer confidence, and earnings from Cintas were on Wednesday.
It remains to be seen what further actions by the Federal Reserve will mean for homebuyers who were just getting their heads around rates at the lower 6% level that may bounce higher.
Economists’ predictions range from prices rising by around 5% this year, according to Realtor.com, to as much as a 22% decline from the peak in 2022 to the trough, according to John Burns Real Estate Consulting.
More inventory would be available from homeowners locked into ultra-low mortgage rates from the past couple of years.
“Half of the country may experience small price gains, while the other half may see slight price declines,” said Lawrence Yun, NAR chief economist. “However, markets in California may be the exception, with San Francisco, for example, likely to register price drops of 10%-15%.”
“Markets like Manchester, New Hampshire; Columbus, Ohio; Fort Wayne, Indiana; Hartford, Connecticut; Lancaster, Pennsylvania; or Topeka, Kansas are still seeing homes change hands as buyers from more expensive locations are lured by solid local economies and median prices, which in some cases are still below $300,000,” Ratiu said.
The median monthly mortgage payment fell to $2,012 in October from $1,977 in November as mortgage rates began a six-week tumble.
The 30-year fixed mortgage rate hit a trough of 4.7% in late 2022, which is when Yun expects it to go back up to 6.1%.
A Wonderful Surprise for Buyers and Developers: The Case for a 2001-2002 Mirror Image of the Real Estate Market and the New Construction Market
In 2023, we may see a mirror image of 2022 — a somewhat trying first half that gives way to a surprisingly strong back half of the year for buyers, said Leonard Steinberg, corporate broker at Compass in New York.
“The would-be buyers that stepped back from the market in late 2022 can’t and won’t stay away forever, especially given the competing demands from first-time buyers looking to get into the market and retirees looking to move or downsize,” Steinberg said.
Chronic under-building of new homes is also likely to remain a challenge across all market segments as builders grapple with the challenge of balancing a short-term decline in demand with the long-term need for more new housing, he added.
“The spring market will be busier and more competitive, for buyers, while the next two months will be the calm before a more hectic time,” said Tucker.
“The big surprise for a lot of people might be that the market has a really boring year,” said Tucker. It would be a big change of pace. A plain, boring, vanilla year in the housing market would be a wonderful surprise.”
“With a Federal Reserve committed to bringing inflation down, investors expect business investments and consumer spending to pull back,” said Ratiu. The reductions in spending has yet to truly happen with most Americans still employed and seeing modest pay gains.
With more than 10 million jobs open and not enough applicants to fill them, the labor market is going to have a big impact on spending. “This scenario is more likely if corporate executives overreact to the recession chatter and preemptively cut payrolls, which would create a self-fulfilling downward spiral.”
Do Real Estate Rates Continue to Grow This Year? Managing the Labor Market in the Precipitation Season and Implications for Work Market Rebalancing
In the top 150 largest metropolitan areas, home values were up by 10% from a year earlier in November, but still more so than the national average of 10%.
But traditional seasonal norms are expected to kick in come March as more inventory becomes available and more buyers starting to look at what’s available — as long as buyers can stomach the current rates and sellers are willing to give up the ultra-low rates they enjoyed in the past couple years.
“We may have to wait until the start of the spring shopping season for more clarity on the direction of housing markets this year, especially as both buyers and sellers are pulling back from the marketplace,” he said.
We’re in the salad days of the New Year — that period where many feel refreshed and motivated and perhaps even optimistic about the year to come. There’s a certain clarity that comes during this time in January.
Ratiu said that most recent indicators pointed to a still-resilient economy. The labor market remains tight despite the Fed’s efforts to cool the economy: Wednesday’s Job Openings and Labor Turnover Survey, or JOLTS, showed there were 11 million job openings in December, the highest since July.
This is all happening as the Fed tries to actively cool the labor market. Policymakers fear that persistent wage growth in a tight labor market will keep already sky-high inflation levels elevated.
In an interview with the Financial Times this week, Gita Gopinath, second in command at the International Monetary Fund, urged the Fed to continue with rate increases this year, citing the labor market’s resilience.
Will wages moderate this year? Goldman analysts predict that they will do it. They believe that unemployment will grow and wage growth will slow from above 5% in 2022 to about 4% by the end of this year.
“This would still be a bit too hot, but any sizeable drop would provide Fed officials with a proof of concept for the idea that gradual labor market rebalancing can dampen wage and eventually price pressures without a recession,” they write.
Do US Consumer Products End the Great Recession? — Bank of America CEO Brian Moynihan: Inflation and the Future of Retail
The strength of the US consumer is enough to stave off the recession, according to Brian Moynihan of Bank of America.
US retail sales in November were the lowest in almost a year. Analysts say that if sales don’t improve, retailers’ earnings will suffer.
This is the biggest question on investors minds and will affect the markets and the economy this year.
So while rate cuts may be off the table this year, the Fed could opt for more modest increases, or even none at all as the year progresses. That would be welcome relief to investors after four hikes of three-quarters of a point last year.
Officials welcomed softer inflation reports, but stressed that more proof of progress was required and that inflation was still too high.
There is “substantial doubt about the company’s ability to continue” because of its worsening financial situation, the home goods chain said in a regulatory filing.
“Bed Bath & Beyond is too far gone to be saved in its present form,” Neil Saunders, an analyst at GlobalData Retail, said in a note to clients Thursday. “All of this points to bankruptcy as being the most likely outcome.”
The Rise and Fall of the United States Home Price Index: Real Estate Prices in the U.S. During the Fourth and Fourth Quarters of Inflation
The national index fell for the first time since February 2012 in July, and then fell again in November.
All cities in the 20-city index reported declines before seasonal adjustments. After seasonal adjustments, 19 cities still reported declines, with only Detroit increasing 0.1%.
Home prices rose 7.7% in November from the year before, a smaller jump than the 9.2% growth seen in October, according to the latest S&P CoreLogic Case-Shiller US National Home Price Index, released Tuesday.
Miami was up 15.9% from last year and saw its strongest prices for the fifth-straight month. It was followed by Tampa, Florida, up 13.9%; Atlanta, up 10.4%, and Charlotte, North Carolina, up 9.9%. The South and Southeast were the regions that were the strongest.
Bright MLS chief economist, LisaSturtevant, stated that the November report provided evidence of the slowing housing market, but she did not think it showed the worst of the housing market.
Sam Khater, Freddie Mac’s chief economist, said that the one percentage point reduction in rates could allow three million more to qualify and afford a $400,000 loan.
It did so on Wednesday. The Federal Reserve raised interest rates by a quarter point in an effort to continue to fight stubbornly high inflation while taking into account recent risks to financial stability.
The effect of the Fed’s actions are keeping a floor under mortgage rates for the short term, he said, adding that he expects rates to stay around 6% for the next few weeks.
Housing economists and those in the mortgage market are looking to the next report on inflation, set to be released February 14, to see if the pace of price hikes continues to slow.
“For today’s buyer of a median-priced home, the down payment amount is lower than it would have been last summer,” said Ratiu. “While that is positive news, affordability remains a primary challenge, especially for first-time buyers.”
Fed Chairman Powell: The Resilient Economy Means More and More, and the Mortgage Market Will Grow Back Up During the December Real Estate Season
Speaking at the Economic Club of Washington on Tuesday, Federal Reserve Chairman Jerome Powell said the resilient economy means the central bank “may have do more and raise rates more than is priced in.”
The tension between expectations and economic data will continue to seep through financial markets for several more months, said George Ratiu, Realtor.com’s manager of economic research.
Even with rates going down, they are nearly double what they were a year ago and mortgage applications are down, according to the Mortgage Bankers Association.
The MBA expects purchase demand to recover heading into the spring, despite the affordability challenge at the lower end of the market.
The pending sales index, based on signed contracts to buy a home rather than the final sales that are accounted for in existing home sales, rose by 8.1% from December to January, beating economists’ predictions for a rise of 1%. In December, the rise was downwardly revised.
Home sales were down by 24.1% from a year ago, but activity seems to be bottoming out during the first quarter of this year, before improvements can be seen.
All regions saw a month-to-month increase in pending home sales, with the Northeast up 6%, the Midwest up 7.9%, the South up 8.3% and the West up 10.1%.
Lower home prices in the west made for an extra boost, while the south had stronger job growth.
December marked the sixth month in a row of declines for the national index as the cooling in the home prices that began in June continues.
“But as rates are right back up in February, it’s likely that any momentum in this market will be short lived and affordability challenges will remain key to the direction and speed the market moves in the coming months,” she said.
After hitting a 2022 high of 7.08% in November, rates had been trending down. However, they started climbing again in February. Robust economic data suggested the Federal Reserve was not done in its battle to cool the US economy and would likely continue hiking its benchmark lending rate.
“If mortgage rates continue to slide over the next few weeks, look for a continued rebound during the first weeks of the spring homebuying season,” he said.
Yields on 10-year US Treasury bonds climbed on Tuesday ahead of the meeting as investors prepared for the impact of the committee’s revised rate projections, said Hannah Jones, economic data analyst at Realtor.com. The Fed said on Wednesday that its rate hikes may be coming to an end.
While rates remain much higher than a year ago, he said MBA is forecasting a gradual decline, with the 30-year fixed rate falling to around 5.3% by the end of the year.
The Fed’s First Rate Hijack: Implications for the Second Mortgage Market and Mortgage Investors in an Emerging Financial Crisis
If the banking crisis is contained, analysts say it will probably do some work for the Fed by bringing down prices without raising interest rates. The Fed suggested on Wednesday that it may be the end of its rate hike cycle.
The secondary mortgage market may react to speculation that more financial companies may need to sell their long-term investments, like mortgage backed securities.
This could restrict mortgage lender’s access to funding sources, resulting in higher rates than Treasuries would otherwise indicate “For borrowers, lending standards were already quite strict, and tighter conditions may make it more difficult for some home shoppers to secure funding. In turn, for home sellers, the time it takes to sell could increase as buyers hesitate.”
Powell said that the recent banking developments appeared to be almost a work of faith, at this point.
