Mortgage market braces for another possible interest rate rise.
The 30-year mortgage rate topped 6% for the first time in 14 years as analysts fuelled fears of another massive interest rate hike by the Federal Reserve during next week’s meeting. The benchmark 30-year fixed-rate mortgage jumped to 6.02% for the week ending September 15, Freddie Mac reported. That’s up from 5.89% the previous week and more than double last year’s average of 2.86%. Freddie Mac chief economist Sam Khater noted that the 30-year home loan rate has not surpassed 6% since November 2008. “Mortgage rates continued to rise alongside hotter-than-expected inflation numbers this week, exceeding 6% for the first time since late 2008,” Khater said. “Although the increase in rates will continue to dampen demand and put downward pressure on home prices, inventory remains inadequate. This indicates that while home price declines will likely continue, they should not be large.” The 15-year fixed-rate product averaged 5.21%, up from 5.16% last week and from 2.12% a year ago. The five-year Treasury-indexed hybrid adjustable-rate mortgage rose from 4.64% to 4.93% week over week. This time last year, it was 2.51%. Commenting on the impact of the Fed’s decision on mortgage rates, Marty Green, principal of Polunsky Beitel Green, said: “Most market participants now fully anticipate that the Federal Reserve Open Market Committee will increase the federal funds rate by 75 basis points at next week’s meeting, rather than a more modest 50 basis point increase that many thought was more likely a few weeks ago. “The larger increase will negatively impact the residential mortgage market and exacerbate affordability issues for Americans seeking to buy a home. The question is whether the increase in rates will be offset somewhat by sellers reducing the sales price on homes in many markets.”
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Rates increase again, a sign that inflation continues to take a toll on the housing market.
US long-term mortgage rates rose further this week, hitting their highest level since the housing market crash of 2008 that started the Great Recession. Freddie Mac reported Thursday that the 30-year fixed-rate mortgage jumped to 5.89%, up 23 basis points from last week and the highest since November 2008. “Mortgage rates rose again as markets continue to manage the prospect of more aggressive monetary policy due to elevated inflation,” said Freddie Mac chief economist Sam Khater. The 15-year rate climbed 18 basis points week over week to a 5.16% average. A year ago at this time, the 15-year fixed-rate mortgage was 2.19%. The five-year Treasury-indexed hybrid adjustable-rate mortgage increased from 4.51% to 4.64%. Andy Walden, vice president of enterprise research at Black Knight, pointed out the implications of the rate increases for both affordability and (what's left of) refinance incentive. “With 30-year rates at 5.89%, home affordability levels have fallen to a new 35-year low,” Walden said. “Given the large role affordability challenges appear to be playing in shifting housing market dynamics, the recent pullback in home prices is likely to continue.” Khater disagrees, citing recent studies that show a bright side to the higher-rate environment. “Not only are mortgage rates rising, but the dispersion of rates has increased, suggesting that borrowers can meaningfully benefit from shopping around for a better rate,” he said. “Our research indicates that borrowers could save an average of $1,500 over the life of a loan by getting one additional rate quote and an average of about $3,000 if they get five quotes.” Hiring is seemingly downshifting amid rising interest rates and persistent inflation.
US companies increased headcount at a relatively sluggish pace in August, according to a revamped private report that suggests hiring is downshifting in an economy buffeted by high inflation and rising interest rates. Businesses’ payrolls rose 132,000 this month, the smallest gain since the start of 2021, after a nearly 270,000 increase in July, according to newly compiled data from ADP Research Institute in collaboration with Stanford Digital Economy Lab. The latest report released Wednesday reflects updated methodology and includes historical jobs data on a monthly and weekly basis for the last 12 years. The median forecast in a Bloomberg survey of economists called for a 300,000 gain in private employment. “Our data suggests a shift toward a more conservative pace of hiring, possibly as companies try to decipher the economy’s conflicting signals,” Nela Richardson, chief economist at ADP, said in a statement. “We could be at an inflection point, from super-charged job gains to something more normal.” The figures, which are based on payroll transactions of more than 25 million US workers, offer a supplementary view of labor market conditions ahead of the government’s monthly jobs report. Economists will likely take ADP’s data into account, along with a slew of other labor market indicators, when determining to what extent the Federal Reserve’s rapid pace of monetary tightening is impacting the health of the broader jobs market. In June, ADP announced that it would be teaming up with the Stanford Digital Economy Lab to retool the report’s methodology to “provide a more robust, high-frequency view of the labor market and trajectory of economic growth.” The report has been on pause since the May report. Payroll gains were concentrated in leisure and hospitality, trade, transportation and utilities, as well as construction. Employers cut jobs in finance, information, business services and education and health services. Job growth was strongest in the South and West. The government’s monthly jobs report Friday is anticipated to show US private payrolls climbing about 300,000 in August, according to the median estimate in a Bloomberg survey of economists. The unemployment rate is forecast to hold at 3.5%, matching a 50-year low. ADP has emphasized that its new approach to the data moves away from trying to forecast the government’s payrolls figures. However, the July ADP estimate suggests a more moderate pace of hiring than the Labor Department’s non-farm payrolls print showed earlier this month. The report also includes fresh insights into wage growth. Those who changed jobs experienced a 16.1% pay increase from August 2021, more than twice the 7.6% gain for those who stayed at their job. By industry, workers in leisure and hospitality along with trade, transportation and utilities posted the strongest annual pay growth. Women saw slightly faster wage gains than men. The report also showed those working at larger companies are seeing faster pay growth -- 8.3% compared with 5.4% at businesses with fewer than 20 employees. That would see meager growth and rising unemployment – but avoid an overall economic contraction.
Forget about a soft landing. Federal Reserve Chair Jerome Powell is now aiming for something much more painful for the economy to put an end to elevated inflation. The trouble is, even that may not be enough. It’s known to economists by the paradoxical name of a “growth recession.” Unlike a soft landing, it’s a protracted period of meager growth and rising unemployment. But it stops short of an outright contraction of the economy. Powell “buried the concept of a soft landing” with his August 26 speech in Jackson Hole, Wyoming, said Diane Swonk, chief economist at KPMG LLP. Now, “the Fed’s goal is to grind inflation down by slowing growth below its potential,” which officials peg at 1.8%. “It’s a bit like dripping water torture,” added Swonk, who attended the Fed’s annual Jackson Hole symposium last week. “It is a torturous process but less torturous and less painful than an abrupt recession.” The shift in Powell’s message got the attention of Wall Street. Stock prices have swooned since the Fed chair vowed to do what it takes to rid the economy of too-high inflation. Politicians in Washington took note too. Massachusetts Senator and former Democratic Party presidential hopeful Elizabeth Warren voiced concern that the Fed could tip the economy into a recession, while Senate Republican Party leader Mitch McConnell said a downturn was likely as the central bank raises rates to combat inflation. In the archetypal soft landing in 1994-95, the Fed slowed the economy briefly and contained inflation through a doubling of interest rates. But unemployment never really rose. It just stopped falling for a while. The late New York University economist Solomon Fabricant coined the term “growth recession” in research published in 1972. While such a scenario may not be as costly as an actual contraction, it poses dangers for the economy nonetheless, he suggested at the time. A tiger contained “is not the same as a tiger loose in the streets, but neither is it a paper tiger,” he wrote. Powell has seemingly concluded that it will take a tiger -- and not just a soft landing -- to attack America’s pernicious inflation. In his Jackson Hole speech, he said the labor market was “clearly out of balance,” with the demand for workers substantially exceeding the supply. That’s led to rapid wage rises that are incompatible with the Fed’s 2% inflation target. “Reducing inflation is likely to require a sustained period of below-trend growth,” Powell said. “Moreover, there will very likely be some softening of labor market conditions” -- widely seen as a euphemism for higher unemployment. Joblessness probably held steady in August at a five-decade low of 3.5% as payroll growth slowed to 300,000 from 528,000 in July, according to the median forecast of economists surveyed by Bloomberg. The monthly data are scheduled to be released by the Labor Department on Friday. Powell said the pain that businesses and households will have to endure was preferable to the Fed failing to restore price stability now and having to inflict even more damage on the economy later. He left the door open to another jumbo 75 basis-point interest rate increase in September, telling fellow central bankers in Jackson Hole that a recent ebbing of US inflation “falls far short” of what policy makers want to see. Slowing the economy down enough to push up joblessness without tipping the economy into recession will take some luck, however. A weak economy that’s barely growing is much more likely to be knocked off course by an unexpected shock, like a renewed run-up in oil prices. “We are on the edge and very fragile,” said Moody’s Analytics chief economist Mark Zandi. “If anything at all goes off the rails, we’re going into recession,” though he added that’s not his base case. What’s more, once joblessness starts to rise, that has knock-on effects to the rest of the economy, prompting households to pull back on their spending and making a contraction in gross domestic product more likely. The so-called Sahm Rule -- developed by former Fed official Claudia Sahm -- signals the start of a recession when the three-month moving average of the unemployment rate rises by a half percentage point or more from its low in the previous 12 months. That’s a statistical regularity that’s always held, though Sahm -- who now heads her own consulting company -- cautions that there’s nothing regular about what the economy has gone through since the start the pandemic. Another sign that a recession will be tough to avoid: The ongoing downturn in the housing market in response to the upturn in Fed interest rates. In the post-World War II era, there’ve only been three times that such a weakening of housing didn’t lead to a recession -- in 1965-66, 1984-85 and 1994-95, according to Doug Duncan, chief economist at Fannie Mae. And in each of those cases, the Fed began raising interest rates before inflation had gotten out of hand, which is certainly not the case today. Duncan sees a mild recession starting in the first quarter of 2023. Bank of America chief US economist Michael Gapen said a recent string of stronger-than-expected data, including on the labor market, has made him less certain that a recession will begin in the second half of this year, though that remains his forecast as the Fed fights to get inflation under control. “History tells us that more likely than not, getting out of these situations requires more than just a few tenths of an increase in the unemployment rate,” he said. Housing experts react…
US home price growth in June subsided to an 18% annual pace – in line with the forecasts of housing market analysts. The S&P CoreLogic Case-Shiller US National Home Price NSA Index rose 18% year over year in June – a significant slowdown from 19.9% in May. Month over month, house prices were up 0.3% on a seasonally adjusted basis. "Housing market activity slowed considerably over the summer, leading to widespread deceleration in home price growth and rising concerns over recession in the housing market," said CoreLogic deputy chief economist Selma Hepp. "Nevertheless, the rebalancing of buyer and seller expectations was inevitable after overheated and unsustainable demand and price growth, followed by a surge in mortgage rates and consequent constraints on affordability. Thus, cooling of price acceleration, as well as demand, will yield a healthier and more balanced housing market going forward." Craig Lazzara, managing director at S&P DJI, noted that deceleration and decline are two entirely different things and that prices are still rising at a robust rate. According to the National Association of Realtors, the median home sales price hit a record high of $413,800 in June before dipping to $403,800 in July. Existing-home sales price in July was also roughly 11% higher than a year ago. Still, industry experts expect home price growth to slow considerably in the coming quarter. Goldman Sachs chief economist Jan Hatzius forecasted home price appreciation to stall completely, averaging 0% in 2023. "While outright declines in national home prices are possible and appear quite likely for some regions, large declines seem unlikely," Hatzius said. "Home-price appreciation continues to become more gradual as the Fed has worked to manage inflation and raised mortgage interest rates," said Steve Reich, chief operations officer of Finance of America Mortgage. "Data shows there was a significant boost in inventory in June — active listings increased by about 18% compared to the same period last year. This spike can likely be attributed to the fact that more sellers put their homes on the market during the popular summer home buying season, which may have reduced competition in certain markets. "While mortgage rates were higher compared to this time last year and the 30-year fixed mortgage is hovering above 5%, rates are comparable to pre-pandemic levels. For that reason, I believe that prospective homebuyers should look at the glass as half full as they continue or begin their home search. More inventory and slowing demand may provide some wiggle room, and savvy buyers may be able to take advantage of this opportunity." Demand continues to shrink due to heightened market volatility, expert says.
Home loan application activity decreased for the third consecutive week to another multi-decade low, according to the Mortgage Bankers Association. MBA’s Market Composite Index, a measure of mortgage application volume, fell 3.7% on a seasonally adjusted basis and 5% on an unadjusted basis from the week prior. “The 30-year fixed mortgage rate increased for the second week in a row to 5.80%, reaching its highest level since mid-July,” said Joel Kan, MBA’s associate vice president of economic and industry forecasting. “Mortgage rates and Treasury yields rose last week as Federal Reserve officials indicated that short-term rates would stay higher for longer. Mortgage rates have been volatile over the past month, bouncing between 5.4% and 5.8%.” The weekly dip was led by an 8% decline in refinance applications, which now comprise only 30% of all applications. Purchase application activity posted a 2% drop and was 23% lower than the same week a year ago. “Purchase applications have declined in eight of the last nine weeks, as demand continues to shrink due to higher rates and a weaker economic outlook,” Kan said. “However, rising inventories and slower home-price growth could potentially bring some buyers back into the market later this year.” The FHA share of total applications was up 13% from 12.5% the previous week. The VA share of total applications decreased from 11.6% to 11.1%, and the USDA portion decreased from 0.7% to 0.6%. In another sign that market volatility has picked up, Kan noted that the average rate on a jumbo loan was 5.32% – 48 basis points lower than for a conforming loan. “This spread reached a high of over 50 basis points in July – and had narrowed – before now widening again,” he said. Major life events like having a kid or breaking up are now lower-tiered stressors.
their first home in either 2021 or 2022. Respondents spoke about what prompted their decision to buy a house, detailed the moving experience and listed the most stressful aspects of new homeownership. Spoiler alert: With property values soaring, you may already have guessed the nature of respondents’ answers. After all, home prices have risen significantly since December 2020, when the median price of a home was $335,900 as reported by the US Census Bureau and the Department of Housing and Urban Development (HUD). As of May 2020, the median sales price rose to $449,000. “It may not be surprising, but almost half, 40%, said they felt pressure to buy their first home because home prices are rising steadily so they thought it was best to buy sooner than later,” Jeff Kinney, senior editor with 360 Reviews at US News & World Report, told Mortgage Professional America during a telephone interview. Clearly, the days of taking one’s time to find that dream home are over. First-time homeowners are now having to strike while the iron is hot, the study suggests. So just how stressful was it for respondents to buy their first home? Survey participants consider the process to be more stressful than all other big anxiety-inducing events – including breakups, planning a wedding, interviewing for or starting a new job, or even welcoming a child into the family or getting a pet. That’s not a typo. Moving is now more stressful than welcoming a child into the family. Take the survey’s word for it: “It outranked all of the other challenging life experiences we asked respondents to rate in terms of stress, including breaking up with a romantic partner,” the study’s authors wrote. “Our respondents ranked planning a wedding — which often takes months and involves a considerable amount of research, budgeting, and vendor negotiations — as less stressful than moving. Moving also outranked career challenges and milestones, such as interviewing for a new job or starting a new job, as well as having a baby or getting a new pet.” So there you have it: Planning a wedding is a piece of cake compared to buying a home for the first time in this economic climate. Despite the stress overload, nearly half (48%) of respondents said the timing was right financially for them to buy their first home. While they believed they bought a house at the right time, more than one-third (35%) said they wished they had bought a house earlier, according to the survey. But surely those new homeowners are happily settled into their new abodes, feeling the stress of the buying experience gradually melt away. Well, no, because anxiety is the gift that keeps on giving: “More than half of new homeowners feel they’re house rich and cash poor meaning they have more house than they need and mortgages are limiting their cash flow,” Kinney reported. “That was kind of interesting.” Respondents who wished they’d waited longer to buy also primarily cited financial reasons: half of them (51%) said they wished they’d waited so they could save more money, and almost half (47%) said they wished they’d waited “until home prices went down.” The majority of survey participants (52%) said they expected to live in their current home for at least five years, while just shy of 40% said they intended to move sometime in the next two to five years. Fewer than 10% of those surveyed (8%) said they expected to move out in one year or less. The new home purchase process involved multiple offers for a majority of respondents. Just over one-tenth (11%) of the people we surveyed said they bought the first house for which they wrote an offer, but almost as many survey participants (10%) had to submit more than five unsuccessful offers for homes before they finally bought their first house. More than three-quarters of respondents (77%) submitted at least two offers that were rejected before presenting a successful offer to a seller. Breaking down the moving process yields an even more exquisite glimpse into stress levels. Pollsters asked participants to rate which they find the most stressful. More than one-third of survey respondents (35%) said that planning and organizing the actual move was the most stressful part of the experience for them, and an additional one-quarter (26%) said that packing was the biggest stress factor. Compared to the other stress factors involved in moving, the cost of moving was a relatively small stress point, with just over one-fifth of respondents (20%) identifying it as their most-stressful variable. For 19% of survey participants, unpacking was the most stressful part of their moving experience. Consider this: Respondents for this survey detailed their stress levels at a time in the recent past when mortgage rates were lower than they are today as they hover around 7% for a 30-year fixed and around 5.5% for the 15-year version. Home sweet home? More like home sweat home. It may drag down the world's currencies.
A housing-market downturn may drag some of the world’s major currencies down with it. Bank of America Corp. strategists led by Howard Du said in a note Wednesday that the run-up in real estate prices has increased debt levels in some countries and left many homeowners exposed to higher interest rates on floating-rate mortgages. The use of such loans is notable in Canada, New Zealand, Australia and Scandinavian countries. That means higher rates will ripple more rapidly through their economies by driving up consumers’ bills. So central banks there may not need to tighten monetary policy as aggressively as others to achieve the same ends, the strategists said. And if policy makers keep pace with those abroad, a severe recession could result. Either outcome would have negative implications for those countries’ currencies, since lower rates would give traders an incentive to shift money elsewhere for higher returns. “High housing risks have negative FX implications, in our view: less tightening to achieve the same outcome in real terms is FX-negative on relative monetary policy grounds,” they wrote. “Delivering the same amount of hikes in a more leveraged economy could trigger a greater growth slowdown, which is also FX-negative.” The warning comes after the Federal Reserve’s rate hikes have pushed the dollar up strongly this year against its major counterparts, including those Bank of America sees as vulnerable to the housing market. Of those, the Canadian dollar has fared best, slipping less than 4% this year. The Australian and New Zealand dollars are down 5.7% and 10.3%, respectively. The Norwegian krone has declined 11% and the Swedish krona 15%. Milliman releases new data on mortgage default risk.
The US mortgage default risk rate continued its upward trend in the second quarter as the portion of riskier cash-out refinance loans increased. The latest Milliman Mortgage Default Index (MMDI) estimates that the default risk for government-sponsored enterprise acquisitions – purchased and refinanced loans backed by Freddie Mac and Fannie Mae – increased to 2.78% from 2.28% in the previous quarter. “This means that for mortgage loans originating in Q2, the expectation is that 2.78% will become delinquent (180 days or more) over their lifetimes,” Milliman wrote in the Q2 report. While the overall volume of refinance mortgages continued to dwindle due to higher interest rates, historically riskier cash-out refinance loans accounted for 74% of all refi originations in the second quarter. That’s almost double the cash-out refi volume of 34% in all refinance originations in 2021. “Cash-out refinance loans historically have higher default rates compared to rate-and-term refinancing,” said Jonathan Glowacki, a principal at Milliman and author of the MMDI. “In 2022, there’s been an increase in cash-out refinance originations compared to the prior year, which is a contributing factor in the increased mortgage default risk we’re seeing.” Here is what homebuilder sentiment says.
Yes, we are likely headed toward a housing recession, experts agree. In other words, weaknesses are showing in a number of key housing metrics. Whether or not you think it is the right time depends on how you view risk, as being financially dangerous or as an opportunity. Here is what you need to know about a potential housing recession and how it will affect house prices. What is a housing recession? While there is no exact definition for “housing recession,” it usually occurs when there are weaknesses in a number of key housing metrics. For instance, single-family permits have decreased by 4% in the first two quarters of 2022 versus the first two quarters of 2021. The index has dropped below 50. Most importantly, however, builder sentiment has dropped off over the last eight months. These are the weaknesses in key housing metrics as mentioned above. And all of them combined are a good indication of what it looks like to be in a housing recession. Homebuilder sentiment: what does it say?The consensus among homebuilders in the United States is that we are in a housing recession. One month after one of the more significant single-month drops in its 37-year history, homebuilder sentiment is now seeing the market for single-family houses drop into the negative, according to a recent report from Wells Fargo and the National Association of Home Builders, or the NAHB. With a usual score of 50 or higher considered positive, the index fell six points to 49 points in August. That drop represents the eighth straight month of a declining sentiment. Homebuilder sentiment comes from the result of a survey conducted by the NAHB and Wells Fargo Housing Market Index every month. The survey asks over 140,000 members about the state of the housing industry. The most recent score of 49 represents the first time since May 2020 that the index dropped past the score of 50, the number for breaking even. It is also estimated that the housing shortfall in the US is up to as high as four million homes, with it taking up to eight months or more to build new homes. That is compared to up to roughly six months prior to the pandemic. Does a recession reduce the cost of housing? Theoretically, a recession should reduce the cost of housing, but that is not always the case. The current drastically undersold real estate market means property prices are mostly unaffected by certain contractionary forces. This is the case right now even on the precipice of a major economic downturn. Housing prices, for the most part, continued their upward trend throughout 2022, even as mortgage rates increased 4% from January to March. The average property price in the United States spiked 21% from the first quarter of 2021 to the first quarter of 2022. In fact, mortgage rates are trending closer to their highest levels since 2008. Eventually, home prices will likely feel the effects of an unkind seller’s market, especially if, as predicted, mortgage rates continue to soar in response to the Federal Reserve’s barrage of interest rate hikes. Given these economic conditions, it remains to be seen whether it slows current accelerations or ends up easing home prices. Is it better to buy a house during a recession? The answer to this question depends on how the recession is impacting interest rates and real estate markets. In other words, you could be taking a risk by buying a house during a recession. On the other hand, an economic downturn may also present you with a good opportunity. With investors keeping safety top of mind and demand for home loans dropping, interest rates tend to decrease during a recession, financial experts say. In this scenario, rising mortgage rates force a significant number of homebuyers out of the market and decelerate property prices. Currently, financial experts are predicting that both refinance and purchase originations will drop significantly. In fact, most refinance activity is expected to be cashing out. Lower property prices and reduced interest rates could mean that a seller’s market flips into a buyer’s market, when the number of properties in the market are greater than the number of buyers. Because supply is greater than the demand, in this case, more properties usually get listed at cheaper prices. A recession might also spur homeowners to conduct a short sale. A short sale is when you sell your home for less than what you owe on your mortgage. This may seem advantageous for homebuyers, but it is a long process and, if the price is too low, the bank might ultimately reject it. |
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