Weekly Economic Update

Economic News:

The Fed Spoke – Why Didn’t Rates Raise Immediately?

Long term rates have risen even though the Fed has not raised rates in years.

We think it is best to remind our readers when the Federal Reserve hits the headlines. Close to a month ago, the Fed met and came out with some pretty strong statements. First, they sped up the tapering of their purchases of bonds and mortgages after supporting the markets throughout the pandemic.?Second, they “projected” multiple rate hikes in 2022.?As a result, many braced for further rate increases.

Only this did not happen. There are plenty of reasons for this lack of reaction by the markets.?Regarding tapering of their purchases, it is assumed the Fed had determined that the markets could stand on their own two feet without the Fed support.?In fact, one reason there is inflation today is that there is too much cash chasing too few goods. Thus, there is plenty of appetite for investments such as bonds and mortgages. Increasing home prices make mortgages an even safer investment.

With regard to hiking interest rates, we must remember that the Fed controls short-term rates directly. We are talking “overnight,” which is very short-term. The rates consumers deal with, such as mortgages, are very long-term. Mortgage rates move with the markets.?And while the Fed has not raised rates in years, long-term rates have already risen by one-half of one percent within the past year. Thus, the Fed move is trailing the markets.?As a matter of fact, the Fed’s strong language to control inflation may serve to calm the markets. We are not saying that rates will not rise this year, and if the first few trading days of the year is any indication, it looks as though the trend will continue to be higher. Especially as the markets reacted to a reminder of the Fed statement through the release of the minutes of their meeting last week.

The Downside of Home Price Appreciation

Increased property tax bills are adding fuel to an uptick in foreclosures.

A new analysis by digital homeownership platform Knock has found that as the nation's double-digit home price appreciation has pushed homeowners’ equity to record highs, it is not necessarily good news for all homeowners. While the nation's recent home price has boosted homeowners struggling with underwater mortgages, for others, the housing boom fueled by low rates and the pandemic have resulted in higher tax burdens. Knock’s analysis focused on the impact of home price appreciation, unemployment rates, debt-to-income ratios, income inequality, and the length of the foreclosure process on real estate-owned (REO) transactions, found that those already struggling to meet their mortgage payments are at the greatest risk of losing their home to foreclosure as property taxes rise.?"Home price appreciation has become a double-edged sword," said Knock Co-Founder and CEO Sean Black. "Until recently, lack of home price appreciation has been attributed to underwater mortgages and high foreclosure rates, but in 2021 upticks in foreclosures are more a result of rising home values pushing at-risk homeowners over the edge with increased tax burden. Going forward, property tax increases may exacerbate foreclosure rates in states where unemployment, income inequality and debt-to-income ratios are prevalent." (Source: DSNews)

Real Estate News:

Will Rising Rates Effect Home Sales?

Over the last 30 years home sales have declined in only two of the six times that mortgage rates rose significantly.

First American’s proprietary Potential Home Sales Model measures what the healthy market level of home sales should be based on economic, demographic, and housing market fundamentals.?For the month of November, the main takeaways were: potential existing home sales decreased to 6.26 million annualized rate (SAAR), representing a 79.5% increase from the market potential low in February 1993. However, the market potential for existing-home sales increased 7.2% year-over-year, a gain of 422,000 (SAAR) sales. Currently, potential existing-home sales is 533,000 (SAAR), 7.9% below the pre-recession peak of market potential, which occurred in April 2006.

“Demand for homes was strong prior to the pandemic,” said Mark Fleming chief economist at First American, “then housing demand accelerated amid the pandemic as buyers wanted more space, enjoyed more geographic flexibility in where they could live, and benefited from increased house-buying power driven by record-low mortgage rates. While many of these factors will remain consistent in 2022, mortgage rates are widely expected to rise, so how will that impact home sales?”

Fleming explains that existing-home sales don’t always slow down when mortgage rates rise and are often more influenced by why mortgage rates are rising. “Looking back over almost 30 years, there have been six significant rising-mortgage rate eras,” said Fleming. “Rising mortgage rates led to declining existing-home sales in two of the six rising-rate eras.” Overall, Fleming demonstrates through these examples that existing home sales are resilient in a rising-rate environment. “For example,” he says, “mortgage rates spiked in the summer of 2013 when the Fed indicated it would taper its quantitative easing policy of buying Treasury bonds and mortgage-backed securities. But this ‘taper tantrum’ had no negative impact on existing-home sales.” (Source: National Mortgage Professional)