Zillow Econ. Chief says crisis? What to expect at Fed Reserve Meeting

Yesterday, the National Association of Realtors (NAR) released data revealing the amount of homes sold in the month of June. As many predicted, the amount fell, by 1.8% to an annual rate of 5.52 million homes sold per year. The reason, as has been widely reported, is that would-be homebuyers cannot find anything that they can afford.

There is plenty of pent up demand, as evidenced by many surveys showing that most people would rather buy a home than rent one. According to the NAR, the amount of homes listed on the market has declined for 25 straight months. This is obviously an issue as the rate of unemployment, both cyclical and long term, has been trending down over the last few years.

As we all understand basic economics, less supply with the same demand will increase prices. However, not only are we seeing a reduction in supply of homes, but with an increasing population who is doing better as measured by unemployment and average incomes, the price is sure to get out of control. In fact, that is exactly what we are seeing. In the last year, home prices has climbed ~6.5% to a median sales price of $263,800.

"The lack of sales listings may be bordering on a crisis" Svenja Gudell, Chief Economist: Zillow

Compounding this fact is the simple reality that the Federal Reserve is intent on raising interest rates '...as planned'. The average 30 year fixed rate mortgage going into this week was 4.03% (with no points) vs ~3.4% last year. While the current rate of interest is low by historical standards, the fact that home prices are higher than the pre-recession 2008 peak is an issue. The rates were low enough to ease buying pressure last year; not so much this year.

After the 2008 peak, most construction was halted; especially for lower priced homes. The more expensive homes continued to be built, albeit at a lesser rate, and now there is severe pressure on the lower end of the housing market.

The question is: Are we at the peak of a market again?

Speaking of the Federal Reserve, those of us in Real Estate will be tuned into the Federal Open Market Committee's meeting this week. However, history tells us this specific meeting will mean nothing. Why is that you ask?

In March of 2011, the Fed announced that while it would continue to meet 8 times per year, 4 of those meeting would include 'Economic Projections', while the remaining 4 would contain the same previous information. The Economic Projections would include forecasts of the economy, and the dot plots that we all know and love.

2011 came and went, but by 2012, some market insiders started to pick up on the fact that all of the important data was coming in the 4 Economic Projection meetings. So, by 2013, the entire bond market had begun 'pricing' this into their moves. The Fed has even gone so far as to try and hype up their off-cycle meetings; saying that the market shouldn't expect nothing and that they could 'surprise you'.

As the above chart represents this effect in the last year, if we believe this trend to continue, there should be no major moves in the bond market. However, it is always possible that the data 'surprises us', and this leads to a major bond selloff, driving up the yield /driving down the price of the 10 year (in this scenario).

At the time of press, the 10 year is up 47 basis points in pre-market trading.

Sources:

-National Association of Realtors

-Mortgage News Daily; link HERE. Chart Courtesy of MND

-Zillow

About:

Andrew Leonardis is an Account Executive with LoanDepot Wholesale focusing on Broker and Correspondent lending, but is also an experienced Loan Officer. Andrew studies, follows and researches economic, financial and mortgage market related topics. Please reach out with any questions/comments on the article, or with any mortgage related scenarios to [email protected] or 609.254.4976