The new conforming loan limits for 2022 have been announced, an increase of more than 18% over 2021, and up by more than 52% since 2017!

The new conforming loan limits for 2022 have been announced, an increase of more than 18% over 2021, and up by more than 52% since 2017!

Omicron Versus Fed

December 3, 2021 -- A week ago, another word was added to the COVID-19 vocabulary: Omicron. Fearing perhaps another round of growth-sapping lockdowns and disruptions, investors did a hard shift from riskier assets to those offering at least some safety, and influential yields plummeted across the globe. This occurred despite that not much is yet known about the new variant, or whether it's better, the same or worse than others that have emerged. Markets have been quite volatile since.

Until the news, forward-looking futures markets seemed to be penciling in perhaps three increases in the federal funds rate next year; that fell back to perhaps one to two increases expected in the coming year. This happened despite a revelation by Federal Reserve Chair Powell before Congress that the Fed is likely to start removing monetary accommodation at a faster pace very soon.

Once declared to be "transitory", inflation has begun to create increasing challenges for central bankers around the world. Just last month, in a precursor to eventually raising short-term interest rates, the Fed announced that it would begin trimming purchases of Treasury bonds and Mortgage-Backed Securities by $15 billion per month, a pace of reduction that is also in place for this month. Based upon the statement at that time, we wrote after the last Fed meeting, that "we infer from the Fed's statement and Chair Powell's comments that a faster pace in reductions is very likely once the calendar turns to 2022."

This was all but confirmed this week by Fed Chair Powell in testimony before Congress, where he noted that "the economy is very strong and inflationary pressures are high and it is therefore appropriate in my view to consider wrapping up the taper of our asset purchases ... perhaps a few months sooner." Also, after working to distance the Fed from the "transitory" expectation for inflation, Chair Powell also noted that it was time to "retire" the use of that characterization of inflation, since "It now appears that factors pushing inflation upward will linger well into next year."

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There's been nothing in the recent economic data and none in this week's batch to suggest much by way of cooling in either the broad economy or in price pressures. With inflationary pressure fanning out across the economy and into wages, the risks are growing that the Fed may need to act more forcefully to curtail demand, at least enough to start to revert inflation back toward its long-term goal.

Twin measures covering both the manufacturing and service-sector sides of the economy were released this week by the Institute for Supply Management, and both were solidly positive. The ISM's manufacturing gauge posted a slight rise of 0.3 points, but that was enough to move the needle to 61.1, a robust level. The measure covering new orders pushed 1.8 points higher to 61.1, and the employment metric strengthened a bit more, climbing 1.3 points to 53.3 for the month, a modest-to-moderate level. Unfortunately not modest nor moderate was the "prices paid" tracker; at a value of 82.4, it was about average for the last four months at a very elevated level, if down just a bit from October's reading. All in all, the manufacturing sector is cruising along despite all manner of price and supply-chain challenges.

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The much larger service side of the economy started gaining fresh steam a couple of months ago, as the Delta variant's effects diminished. That continued even more strongly during November, when the ISM's service-business barometer rose another 2.4 points to 69.1, a new record for the 25-year old indicator. New orders remained at a very robust 69.7 for a second consecutive month; employment posted a 4.9-point increase to 56.5, strongest since April, when the winter surge of COVID had run its course. Like the manufacturing sector, prices paid measured here remained very elevated, although the 0.6-point decline to 82.3 was down a touch from a 16-year high. Regardless, prices here and on the production side of the economy remain both high and firm.

The Fed's regional review of economic conditions (called the "Beige Book" for the color of its cover) noted that "Economic activity grew at a modest to moderate pace in most Federal Reserve Districts during October and early November" (through November 19). With its inflation mandate already surpassed, the Fed has turned its focus to getting the labor market back to "full employment", something that is rather a vague goal. Getting there -- wherever it may be -- may prove to be a challenge: "Childcare, retirements, and COVID safety concerns were widely cited as sources that limited labor supply," noted the report, amid "robust demand for labor but persistent difficulty in hiring and retaining employees." On the inflation front, "Prices rose at a moderate to robust pace, with price hikes widespread across sectors of the economy" allowing "firms to raise prices with little pushback" so there are growing indications that price increases are sticking, and for those wondering if a more entrenched "wage-price spiral" might be forming, the report noted "Hiring struggles and elevated turnover rates led businesses to raise wages and offer other incentives, such as bonuses and more flexible working arrangements." As such, the evidence such formation remains inconclusive, but perhaps some of the ingredients are starting to be seen, and a wage-price spiral doesn't necessarily need to be at 1970s level to exist, either.

The softening in hiring in August and September has all been revised away. Delta and confusion over the start of the school year no doubt did distort hiring during the period, but August's initial report was improved doubled to 483,000 hires, while September's was nearly doubled to 379,000. October's now-546,000 new hires powered strongly higher, although this month's initial revision only added 15,000 jobs to the original estimate.

What to make then, of the 210,000 new hires that took place in November, a figure that fell far short of expectations? Lots of headlines called the increase "disappointing", although the figure is still solid enough. There are still about 3.9 million fewer employed folks than before the pandemic distorted everything now some 20 months ago, and just as it took a number of years during the longest expansion in U.S. history to engage enough workers to create the best employment market in 50 year, it may take some time to get all those folks back to work and into positions that are available to them. Of course, perhaps a majority of those not employed may have retired and left the workforce, and it may take very sweet employment deals to entice even some of those folks to return, if at all. Average hourly earnings rose another 0.3% in November and are running at a strong 4.8% annual rate, although one that is unfortunately below the rate of inflation at the moment.

With labor markets tight, it stands to reason that layoffs and claims for unemployment assistance remain low. The outplacement firm of Challenger, Gray and Christmas reported a total of 14,875 announced job reductions in November, the lowest since May of 1993, and the total announced cuts this year (so far) as tracked here are the lowest on record. In terms of new requests for help, initial unemployment claims actually rose to 222,000 in the week ending November 27, moving back to trend after a seasonal-adjustment distorted drop to 194,000 in the prior week. The next week or so should provide a clearer picture of where initial claims truly are, but they are likely somewhere around the 260K mark at the moment. After that, holiday distortions again cloud the picture for a couple of weeks, but the trend here is one that has been gradually moving toward pre-pandemic levels more steadily than not.

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So the job market remains tight for employers. The nation's official unemployment rate legged down sharply in November, falling another 0.4% -- a remarkable full percentage point drop in just the last four months. At the same time, the labor force expanded by almost 600,000 workers, the biggest bump in a year, and the labor force participation rate edged up to 61.8%, the highest level it has achieved since the onset of the pandemic in March 2020. Still, it remains 1.5 percentage points below the last pre-pandemic level, and it will likely be some time before that level is again achieved.

This poses the question: What measurable levels of hiring, unemployment and other metrics would we need to see to consider employment to be "full"? If hiring is happening in a positive way, layoffs and unemployment claims are at or approaching record lows (even if not the 50-year low levels of not long ago). and the participation rate edges only a bit higher than now, could this be considered "full", where the Fed would take more routine steps to "normalize" monetary policy? It's not clear, but if present trends continue we may soon be at levels that some would consider full employment -- even without a 3.5% unemployment rate and a 63%+ participation level. If nothing else, next year is shaping up to be a very interesting one as far as the Fed goes.

Going back a bit, in September, the Fed offered its first ruminations that it would start to pull back on the QE-style bond buying programs it was running. This may have pushed a few on-the-fence homebuyers into the market, who likely figured that mortgage rates might not get any better than they were at the time. This is as plausible a reason as any for the 7.5% increase in the National Association of Realtors Pending Home Sales Index for October, a bounce that took the gauge to its highest level since December 2020. Certainly, markets conditions for homebuyers haven't improved so as to warrant such a response by consumers, what with inventories still very lean and prices continuing to rise steeply, but respond they have, even with the indicator about 1.4% below year-ago levels.

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Requests for purchase-money mortgages have been a bright spot for mortgage lenders of late, too. The Mortgage Banker's Association reported a 7.2% overall decline in requests for mortgage credit in the (holiday) week of November 26. That decline was all due to a 14.8% drop in refinancing requests; purchase-money request rose 5.1% and have now risen in each of the last four weeks (and in six of the last eight). At least in this market, refinancing seems to be wholly-dependent on 30-year fixed-rate mortgages holding below 3%. While there is a chance we might test that level again in the current Omicron market mess, rates have only breached the 3% mark twice since summer came to a close.

The 2022 limits for conforming loans were announced this week, rising by $98,500 to $647,200 -- up by 52% in just the last five years alone. For other such comparisons, see a history of conforming loan limits at HSH.com.

Construction spending rose just a bit in October, climbing 0.2%. None of the increase came from the residential side of the ledger; in fact, the 0.5% decline came on the heels of a 0.2% dip in outlays for residential projects in September, too. Sales of new homes haven't had all that much traction of late and supplies there are pretty solid, so there's little reason to build houses more quickly at the moment. Non-residential construction spending rose by 0.2%, edging a bit higher, and public-works projects saw a 1.8% lift. More will eventually be seen in this category, what with the infrastructure bill that was recently signed into law.

Current Adjustable Rate Mortgage (ARM) Indexes

IndexFor The Week EndingYear Ago
Nov 26Oct 29Nov 27
6-Mo. TCM 0.09% 0.06% 0.09%
1-Yr. TCM 0.21% 0.14% 0.11%
3-Yr. TCM 0.92% 0.76% 0.21%
10-Yr. TCM 1.61% 1.59% 0.87%
Federal Cost
of Funds
0.749% 0.752% 1.003%
30-day SOFR (daily value) 0.05000% 0.04767% 0.08634%
FHLB 11th District COF 0.225% 0.225% 0.503%
Freddie Mac
30-yr FRM
3.10% 3.09% 2.72%
Historical ARM Index Data

Consumers have not been particularly happy of late. The latest measure of Consumer Confidence from the Conference Board noted a decline in November, as this tracker of moods dropped from a downwardly-revised 111.6 in October to 109.5 for latest month. Assessments of present conditions were rated less favorably, with a three-point drop to 142.5, the lowest since April, and the forward-looking gauge eased 1.4 points to 87.6, about the average level of the last three months, and one considerably lower than earlier in 2021. With concerns aplenty and inflation high, buying plans for autos, houses and appliance were all pulled back during the month, and in terms of standout, the homebuying measure dropped back to levels last seen in about November 2019. At the same time, inflation expectations keep powering higher and is a full percentage point higher in just the last five months. It is likely that the emergence of the new coronavirus variant will see consumer moods deteriorate further in December.

While "Omicron versus Fed" almost sounds like an old 1950's B movie, the reality is that the Fed is starting to adapt policy -- and perhaps more quickly -- to try to attenuate spreading price pressures. At the same time, a new outbreak of the Omicron variant may exacerbate inflation pressures by putting new strains on supply chains, and this would come concurrently with the virus' potential to diminish economic activity, something that would normally see the Fed looking to keep policy accommodative as an offset. Tightening monetary policy into a slower period of economic activity runs the risk of pushing the economy into an even slower growth pattern, which would help quash inflation, but come at the cost of slowing economic improvement for consumers and businesses alike.

As it has, the virus will likely have the strongest say in the matter. Presently, money has poured into Treasury bonds, driving yields down late Friday to August and September levels, but there hasn't been much follow-through into mortgage rates so far. Before the revelation of the new variant, mortgage rates were poised to move higher, and while that upturn was upended by the Omicron news, about all it has done so far is left mortgage rates about where they had been over the last couple of weeks. With this in mind, markets are quite restive at the moment and forecasting a challenge, but we could see a couple of basis point decline of so in the average offered rate for a conforming 30-year fixed-rate mortgage as reported by Freddie Mac next Thursday morning.

Wonder what we expect will happen to mortgage rates between now and the end of the year? Check out our latest Two-Month Forecast for mortgage rates.

As is always the case, our mid-year review of our 2021 Outlook is still available, so you can see how our prognostications for a range of topics are coming along. Just a few weeks of the year remain; have a look and see how we've done in '21.

For a really long-run outlook, you'll want to check out "Federal Reserve Policy and Mortgage Rate Cycles".

In most areas, home prices have been rising for years. If you're curious about how much home equity you have -- or will have at a future date -- you should check out HSH's KnowEquity Tracker and Projector, our unique home equity calculation and forecasting tool.

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