Officials outline a long-awaited plan
Federal Reserve officials laid out a long-awaited plan to shrink their balance sheet by more than $1 trillion a year while raising interest rates “expeditiously” to counter the hottest inflation in four decades. The roadmap for reducing the assets they bought during the pandemic was spelled out on Wednesday in minutes of their March meeting, when officials raised rates by a quarter point. They debated going bigger but chose caution in light of the uncertainty caused by Russia’s invasion of Ukraine, the record of their discussion showed. In addition, “many” who attended the March 15-16 Federal Open Market Committee meeting viewed one or more half-point increases as possibly appropriate going forward if price pressures fail to moderate. Analysts saw this as evidence that officials now fear that they should have acted sooner against inflation and are now in a hurry to get their main rate -- currently in a target range of 0.25% to 0.5% -- up to neutral, the theoretical level that neither speeds up the economy or slows it down. “The FOMC stayed far too easy for far too long and has belatedly realized their mistake,” said Stephen Stanley, chief economist at Amherst Pierpont Securities LLC. “They are now scrambling to get policy back to neutral as quickly as they can. Once they arrive at something close to neutral, they will have to ascertain over time how far into restrictive territory they have to move to get inflation back under control.” The effort to reduce the balance sheet will extend a sharp pivot toward fighting inflation, as the Fed was buying bonds as recently as last month as it attempted a smooth wind-down of pandemic support. The FOMC is expected to approve the balance-sheet reduction at its next gathering on May 3-4. The plan for shrinking the balance sheet came via a staff presentation to officials. Officials proposed shrinking the Fed’s balance sheet at a maximum monthly pace of $60 billion in Treasuries and $35 billion in mortgage-backed securities -- in line with market expectations and nearly double the peak rate of $50 billion a month the last time the Fed trimmed its balance sheet from 2017 to 2019. They backed phasing those caps in over three months “or modestly longer if market conditions warrant.” The record of the closed-door meeting showed a lot of support among the 16 officials who took part for raising rates by 50 basis points. “Many participants noted that one or more 50 basis point increases in the target range could be appropriate at future meetings, particularly if inflation pressures remained elevated or intensified,” the minutes said. “Participants judged that it would be appropriate to move the stance of monetary policy toward a neutral posture expeditiously.” The neutral rate is estimated to lie around 2.4%, according to the median estimate of officials released at the meeting. Officials “also noted that, depending on economic and financial developments, a move to a tighter policy stance could be warranted,” the minutes said. US central bankers since then have said they could move more rapidly on policy, after Russia’s invasion sent food and energy prices soaring, with Powell declaring on March 21 that a half-point increase was on the table if needed in May. With getting to neutral the clear policy goal now, investors will position around how fast the Fed intends to get there. Near-term data on inflation progress will play a large role in those decisions. Powell said last month that as “the outlook evolves, we will adjust policy as needed.” Futures markets are pricing in high probability of a half-point hike at the May meeting. The impact on balance sheet reduction on financial conditions, though, will likely be observed carefully in the second half of the year. “I think 50 basis points is going to be an option that we will have to consider, along with other things,” Kansas City Fed President Esther George said in a Bloomberg News on Tuesday. “We have to be very deliberate and intentional as we remove this accommodation. I am very focused on thinking about how the balance sheet moves in conjunction with policy-rate increases.” A bigger risk and policy challenge will come if Russia’s invasion of Ukraine sustains high food and energy prices for enough time to set off another round of wage and price hikes. That would likely have to be met with even more aggressive policy by the Fed if it starts to unseat expectations about the central bank’s ability to anchor prices. “Against a highly uncertain and rapidly shifting economic backdrop, the Fed has shifted from talk to action,” said Guy LeBas, chief fixed income strategist for Janney Montgomery Scott in Philadelphia. “Financial conditions are going to remain volatile for much of the next six months as a result.”
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Increase in rates has started to impact activity, says Freddie Mac chief economist
Mortgage rates soared higher again this week in Freddie Mac’s weekly Primary Mortgage Market Survey. The fixed 30-year mortgage rate was up five basis points from last week to 4.72% for the week ending April 07. It is also more than a percentage point higher than this time a year ago when it averaged 3.13%. Federal Reserve officials recently announced that they will start reducing its mortgage and treasury bonds sometime in the next couple of months. Notes from the FOMC meeting on Thursday also signal that the Fed is raising interest rates by a quarter-point – and possibly by a half-point – to counter the 40-year high inflation. “Mortgage rates have increased 1.5 percentage points over the last three months alone, the fastest three-month rise since May of 1994,” Freddie Mac chief economist Sam Khater said. “The increase in mortgage rates has softened purchase activity such that the monthly payment for those looking to buy a home has risen by at least 20% from a year ago.” The 15-year fixed-rate mortgage posted an eight-basis-point week-over-week increase, up to 3.91%. Last year, the 15-year FRM was 2.42%. The five-year Treasury-indexed hybrid adjustable-rate mortgage rose from 3.50% the previous week to 3.56%. A year ago, the five-year ARM averaged 2.92%. Pessimism persists in nearly all demographic groups
Consumers’ outlook on home buying continues to worsen due to the trajectory of mortgage rates and market conditions, according to Fannie Mae’s Home Purchase Sentiment Index (HPSI). Overall, the index slipped 2.1 points month over month to 73.2 in March – the lowest in four months. Compared to a year ago, the HPSI was down 8.5 points. Broken down by its components, four out of six posted declines, including the components asking consumers whether they expect mortgage rates to go up and whether they think it’s a good time to buy a home. The net share of respondents who feels that now is a good time to buy a home fell to a new survey low, with 73% of respondents reporting that it’s a bad time to buy a home. “The ‘Good Time to Buy’ component of the index reached yet another record low, with high home prices, rising mortgage rates, and macroeconomic uncertainty serving as consumers’ chief concerns,” said Fannie Mae deputy chief economist Mark Palim. “Only 24% of consumers believe it’s a good time to buy a home, with similar levels of pessimism expressed by nearly all of the demographic groups surveyed.” Meanwhile, the percentage of Americans who said it is a good time to sell increased 3% month over month to 74%. The net share of respondents who said home prices will go up in the next 12 months dropped two percentage points to 48%, and the net share of those who anticipates mortgage rates to go down decreased one percentage point to 4%. “This month, we also saw a survey-high share of consumers expecting their financial situations to worsen over the next year; this was especially true among current homeowners,” Palim noted. “These concerns, together with the run-up in mortgage rates since the end of 2021, will likely diminish mortgage demand from move-up buyers – and fewer move-up buyers mean fewer available entry-level homes, adding to the rising-rate challenges for potential first-time homebuyers.” The job concerns component saw a 3%-drop to 86%, while the household income component increased one percentage point to 29%. “If consumer pessimism toward homebuying conditions continues and the recent mortgage rate increases are sustained, then we expect to see an even greater cooling of the housing market than previously forecast,” Palim said. MBA reveals findings of its latest Mortgage Credit Availability report
Lenders tightened their credit standards a little bit in March, according to an analysis from the Mortgage Bankers Association. MBA’s latest report showed that overall mortgage credit availability edged down by 0.7% to 125.1 in March, indicating a slight tightening in lending standards. The index was benchmarked to 100 in March 2012. Joel Kan, associate vice president of economic and industry forecasting at the trade organization, said that the drop in credit availability was “driven by a reduction in higher LTV, lower credit score programs.” “Credit availability has gradually trended higher since mid-2021 but remains around 30% tighter than it was in early 2020,” Kan said. “There were also mixed trends for the various loan categories, as conventional loan credit availability increased for the second month in a row, while government credit supply decreased to its tightest level since February 2014. Additionally, jumbo credit expanded for the tenth time in the past 12 months but remained almost 40% lower than the pre-pandemic level.” The Conventional MCAI posted a 0.3% uptick, while the Government MCAI dipped 1.6%. Of the component indices of the Conventional MCAI, the Jumbo MCAI grew by 1.5%, and the Conforming MCAI fell by 1.9%. From the federal government to businesses, efforts to root out bias gain traction
The Mortgage Bankers Association – the national group representing the real estate finance industry – recently praised the federal government’s efforts to root out racial and ethnic bias in home valuations, but has asked for a robust heads up prior to the implementation of new rules. Work on the ambitious Interagency Task Force on Property Appraisal and Valuation Equity (PAVE) Action Plan began on June 01, 2021 – the centennial of the Tulsa Race Massacre – to develop a transformative set of actions to root out racial and ethnic bias in home valuations, the White House announced. Federal officials described the plan as “…the most wide-ranging set of reforms ever put forward to advance equity in the home appraisal process.” Responding to the plan’s completion, MBA president and CEO Bob Broeksmit, lauded the efforts. “MBA welcomes the release of the report of the Interagency Task Force on Property Appraisal and Valuation Equity (PAVE), which provides a detailed and comprehensive action plan to combat appraisal bias,” Broeksmit said. “While the role of mortgage lenders in the appraisal process is limited by design, MBA and its members are committed to working with policymakers and other stakeholders, including appraisers, to develop solutions that ensure borrowers receive a fair and accurate estimate of the value of their homes.” In announcing its plan, the White House noted that a home appraisal is a “…critical element of the home buying and lending process, intended to provide an independent, fair, and objective estimate of the market value of a property so that lenders can accurately evaluate risk.” Broeksmit noted the group he heads has made the same issue a priority. “MBA and its members have made improving the appraisal process a top policy issue, and have prioritized it both as part of our CONVERGENCE initiative to promote more sustainable, affordable housing for minority and low- to moderate-income families and communities, and as part of our Building Generational Wealth Through Homeownership campaign,” he said. He added: “We appreciate the work that the PAVE task force has undertaken to document the historical foundations of inequitable property valuations and to identify ways to address problems in modern appraisal processes. Many of the initiatives announced today can be an important step in the fight toward eliminating biases, improving appraisal accuracy, and opening access to more affordable, sustainable homeownership opportunities for minority borrowers.” However, Broeksmit also noted the need for a robust heads-up before the implementation of the sweeping reforms. “While the report notes that many of the reforms can be put in place under existing authorities, it will be important for Task Force agencies to provide ample notice and comment opportunities for stakeholders during the implementation process,” he said. The importance of housing in creating generational wealth was noted by the White House in announcing the creation of the task force. “Homeownership is the primary contributor to wealth building for Black and Brown households and continues to hold promise for building multigenerational wealth and housing stability for households of colors,” federal officials said. “But bias in home valuations limits the ability of Black and Brown families to enjoy the financial returns associated with homeownership, thereby contributing to the already sprawling racial wealth gap.” To buttress the point, the White House offered sobering statistics that contribute to the sprawling racial wealth gap: “Today, the median white family holds eight times the wealth of the typical Black family and five times the wealth of the typical Latino family. According to a recent study, eliminating racial disparities in the number of wealthy families gain from owning a home would narrow the wealth gap by an additional 16% between Black and White households and by an additional 41% between Latino and White households.” The MBA endorsement is key, given the group’s sizable rank and file of some 2,000 companies in an industry of more than 390,000 people covering the breadth of real estate finance – including independent mortgage banks, mortgage brokers, commercial banks, thrifts, REITs, Wall Street conduits, life insurance companies, credit unions and others in the mortgage lending field. Even before the work of the task force concluded, some companies have launched internal processes to weed out appraisal bias through the use of artificial intelligence. Last December, Mortgage Professional America visited San Francisco-based HouseCanary – a self-described technology and data-forward national real estate brokerage – to learn of its efforts. To test the efficacy of its own technology, HouseCanary officials conducted a statistical study using a recent Freddie Mac report showcasing bias as a guide. The aim: To test the accuracy of the brokerage firm’s in-house, automated valuation tools in appraising homes in minority neighborhoods. The result: “No evidence of racial bias exists in HouseCanary’s automated comp and AVM (automated valuation models) tools,” company officials concluded in their study. “This stands in stark contrast to the results of Freddie Mac’s examination of traditional appraisals, which found that ‘Black and Latino applicants receive lower appraisal values than the contract price more often than white applicants.” It contrasts the pandemic buying frenzy
Demand for second homes in the US is plummeting as mortgage rates climb steeply. After a pandemic buying frenzy, mortgage-rate locks to buy second homes dropped last month to the lowest level since May 2020, according to a report by Redfin Corp. While demand was still up 35% from February 2020, before COVID-19 hit the US, it was significantly lower than the previous month’s 87% jump, the brokerage said. Enthusiasm for vacation homes shot through the roof earlier in the pandemic as remote workers, untethered from the office, sought more sunshine and space. But escalating prices -- driven by fierce competition for a tight supply of listings -- and a recent surge in mortgage rates have slowed the boom. Those two factors “are hitting the second-home market much harder than the primary-home market,” said Redfin Chief Economist Daryl Fairweather. “That’s largely because vacation homes are optional. People don’t need a second home, but they do need a place to live.” Vacation-home demand peaked in March 2021, Redfin said. That was two months after Freddie Mac’s average 30-year mortgage rate hit a record low of 2.65%. Borrowing costs have shot up since the end of last year, landing at 4.67% this week. The rapid increase has pushed even some primary-home buyers to the sidelines at a time when inflation is hurting their budgets. The challenges are particularly tough for first-time buyers who have struggled to find affordable properties as bidding wars for the tightest supply of listings on record push prices out of reach. Contracts to buy previously owned homes declined for a fourth straight month in February as the inventory shortage restricted deals, the National Association of Realtors said last week. Would-be buyers of vacation homes face another potential obstacle: a fee increase ranging from an additional 1% to 4% on second-home loans backed by Fannie Mae or Freddie Mac. That could tack on as much as $12,000 to a $300,000 mortgage, payable upfront or rolled into the loan. While the increase officially doesn’t take effect until April 1, the fees have been priced into loans for almost a month, so that may have deterred some buyers already, according to Rebecca Richardson, a broker at Wyndham Capital Mortgage in Charlotte, North Carolina. The city is about a three-hour drive to both the mountains and the beach, making the area a popular vacation-home spot. Combined with rising rates, the fee increase “has definitely dampened the enthusiasm” among her clients, Richardson said. “It’s becoming a much weightier decision versus last year.” That doesn’t mean the second-home boom is over, especially for people who can pay cash and whose remote-work plans have solidified. “Still, people are buying up vacation homes more than they were before the pandemic, as work remains more flexible than it used to be,” Fairweather said Long-term home loan rates continue sharp uptick amid rapidly rising inflation
The average 30-year fixed-rate mortgage (FRM) has surged to its highest reading since 2018, but some factors suggest that the US housing boom may be far from over. The long-term mortgage rate jumped 25 basis points to 4.67% for the week ending March 31, Freddie Mac reported Thursday. At the same time a year ago, the 30-year FRM was 3.18%. While it is typical for higher mortgage rates to discourage prospective buyers from purchasing homes, Freddie Mac chief economist Sam Khater noted that there are ample signs that their appetite for real estate is still strong. “Purchase demand has weakened modestly but has continued to outpace expectations. This is largely due to unmet demand from first-time homebuyers as well as a select few who had been waiting for rates to hit a cyclical low,” Khater said. The 15-year fixed-rate mortgage averaged 3.83%, up from 3.63% last week. The five-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 3.50%, up from 3.36% the week before. “The flatness of the treasury curve should have an impact on new adjustable-rate mortgage (ARM) offerings relative to 15-year and 30-year fixed mortgage rates,” Robert Heck, vice president of mortgage at Morty, told MPA in an email. “This being said, ARMs have been slower to move relative to the recent uptick in rates, which is largely driven by the bank backing of these products and could cause them to be a strong option in the short term.” “Looking ahead to the spring market, the combination of rising interest rates, continued low supply and rising inflation could slow the housing market from the heights it’s seen in recent months, even if prices continue to rise,” Heck added. |
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