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Have you checked out HSH's new Home Value Tracker? See what's happening with home values in more than 400 metro areas!

Rates Firm Further

New Two-Month Rate Forecast at HSH.com

October 22, 2022 -- It's now a little more than a month past the last Federal Reserve policy setting meeting, with less than two weeks to go until the next one, which may include a formal announcement that tapering of bond buying purchases is imminent.

Since the Fed inferred that QE-style purchases of Treasury Bonds and Mortgage-Backed Securities would likely start to be pared back in November or December, mortgage rates have risen by more than 20 basis points, and the increase doesn't appear to have yet run its course. It has been reckoned that the total impact on mortgage rates from the $120 billion per month purchases might have totaled a quarter of a percentage point; since tapering hasn't yet been formally announced (let alone started) the bump in mortgage rates since the last FOMC get-together isn't strictly related to an actual change in policy.

The Fed's intimation of change has likely altered investor perceptions to a degree -- as has the growing outlook that short-term interest rate increases (aka "liftoff") will be coming in late 2022. That said, the recent bump probably has more to do with the sneaking suspicion that fairly firm inflation is likely to be come less transitional than might have been the case just a few months ago. Upward pressure on costs has continued, has been joined by spiking energy costs, and (at least of late) been joined by faster rising wages, which can help inflation pressures to persist more easily.

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The Fed's latest survey of regional economic conditions (known as the "Beige Book") had a lot to say beyond describing a more modest rate of economic activity in the six-week period leading up to October 8. With regard to inflation "Most Districts reported significantly elevated prices, fueled by rising demand for goods and raw materials. Reports of input cost increases were widespread across industry sectors" noted the report, and the summary went on to say "Many firms raised selling prices indicating a greater ability to pass along cost increases to customers amid strong demand." The outlook for prices from those responding to the Fed's survey were mixed, but with an upward bias: "Expectations for future price growth varied with some expecting prices to remain high or increase further while others expected prices to moderate over the next 12 months." Moderating price increases aren't the same thing as declines by any measure." Supply chain and labor constraints continue to pressure costs and there doesn't appear to be any immediate relief coming for either, although a continued waning in COVID-19 infections and increasing vaccination rates should help over time.

We seem to be on the downside of the summer/early fall surge in the Delta variant; rolling 7-day infection rates have retreated to late July/early August levels of late. That said, it's a little eerie to see that they are nearly exactly the same level as about a year ago... but on the downhill side of the slope rather than the upside, thankfully. However, the indoor season in the northern hemisphere is just getting under way, carrying the risk of another flare higher in cases yet.

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A very flat period for mortgage rates at near all time bottoms through August brought more homebuyers into the market. The National Association of Realtors reported that sales of existing homes rose by 7% in September; these figures represent demand 45-60 days before the month for which they are reported. Looking back, the Realtors Pending Home Sales Index for August (a measure of contracts to buy signed during the month) has risen by 8.1%, making the lift in actual transfers of deeds less surprising that it might seem. The 6.29 million (annualized) rate of sale was the strongest pace since January. Although home prices are still sharply higher this year than last, the 13.3% increase over last year was actually a deceleration (in May and June, comparative year ago increases were in excess of 23%). As well, the actual dollar cost of a median home sold has slipped; after a record high $362,800 in June, that costs has now eased off slightly to $352,800 for September. With the bump in sales for September, inventory levels of home available to buy were again depleted, falling back to 2.4 months at the present rate of sale (from 2.6 months in July and August). Inventories of homes to buy remain very thin, down 0.8% from August and 13% below year-ago levels, so prices will remain elevated even if the year-over-year percentage increases settle back further as we go along.

Firming mortgage rates and the end of the spring/summer selling season will probably see sales of homes settle a bit, but there may be a bit of strength yet to be seen. We'll get a look as signed contracts for existing home purchases in September (influencing October/November sales figures) next week.

The new home market throttled back pretty hard for about six months after starting the year on a tear, but has picked up a bit over the last couple of months. Since demand conditions remain solid, homebuilders are happy; in fact they are becoming even happier of late. In October, the National Association of Home Builders Housing Market Index rose by four points to a value of 80, the highest mark since July. The gauge covering sales of single-family homes added 5 points to rise to 87, nearly a record high, expectations for the next six months moved up three points to 84, strongest since last December, and the measure of traffic of potential buyers at showrooms and open homes rose four points to 65, erasing slower summer readings.

With such ebullient readings, you might expect that builders are getting even busier than they already were, but that's not really the case. In fact, housing starts tailed off by 1.6% in September, easing to a 1.555 million annual rate construction initiation. That's still a pretty strong rate, if one rather below the 2021 peak of 1.725 million seen six months ago. Starts for single-family properties were unchanged at 1.08 million annual units underway; multi-family settled back by 5% to a 475,000 annual rate. Permits for future construction also settled back to trend, with a 7.7% overall decline to a 1.598 million pace. Single-family permits slipped slightly, but multi-family permits dropped by 18.3% for the month. We'll see how newly-constructed homes sold in September next week.

More recent data suggest that sales are slowing. That's the message from the weekly mortgage applications index from the Mortgage Bankers Association. In the week ending October 15, a 6.3% decline in requests for mortgage credit were seen; requests for purchase-money mortgages tailed by 4.9%, a third decline in the last four weeks, and those for refinancing declined by 7.1%, a seventh fall out of the last eight weeks. As noted, mortgage rates have firmed up of late; this shouldn't impact home sales too much, but refinancing activity is waning.

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Overall industrial production declined in September, with Hurricane Ida blamed for the reduced output. Manufacturing production declined by 0.7% in September after a 0.4% decline in August; mining output (think natural gas and oil) dropped by 2.3% (-0.9% the month prior) and utility output fell by 3.6%, wiping out an August gain. With the diminished production, the percentage of industrial capacity in active use fell by a full percentage point to 75.2%, erasing all the summer improvement seen here. Some recovery would be expected, of course, but it has been said that oil and gas extraction has been slow to come back on line.

A local measure of manufacturing activity far away from the Gulf of Mexico continues to show strength, if perhaps a touch less than it had been. The Federal Reserve Bank of Philadelphia's gauge covering factory activity in its district eased by 6.9 points in October, backing down to 23.8 for the month. Sub-measures covering new orders and employment both strengthened, though, with the gauge of orders almost doubling to 30.8, while the employment metric rose 4.4 points to 30.7 for the month. All in all, the districts manufacturing base remains in very good shape despite all manner of supply challenges and amid high input costs.

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Tight labor markets mean companies are trying to hang on to workers as best they can. As we've expected they would, the number of initial unemployment claims has begun to trend downward again, with the 290,000 new applications for assistance submitted in the week ending October 16 a new low since the pandemic began. Requests for special Pandemic Unemployment Assistance have also nearly dried up, with just 2,300 requests in the latest week tallied. The PUA program actually ended early in September, but some states were allowed to use some allocated COVID-19 funds to continue to pay benefits for a time.

The September peak of Delta variant cases of COVID-19 seemed to take its toll on the Conference Board's index of Leading Economic Indicators. Although the barometer still managed a 0.2% increase for the month, it was the smallest rise since February, and suggests there was considerably less momentum in the economy to start the fourth quarter than there was in the third or second. The current reckoned run rate for the third quarter of 2021 is just 0.5%, according to the Atlanta Fed's GDPNow tracker. There is still some new data for the period yet to be incorporated into the model, and revised data may be improved, too, but whatever the first reading of Q3 GDP says next week, it's certain to be much slower than the 6%+ reading of the last two quarters.

Current Adjustable Rate Mortgage (ARM) Indexes

IndexFor The Week EndingYear Ago
Oct 15Sep 17Oct 16
6-Mo. TCM 0.06% 0.05% 0.12%
1-Yr. TCM 0.11% 0.07% 0.13%
3-Yr. TCM 0.66% 0.45% 0.18%
10-Yr. TCM 1.57% 1.33% 0.74%
Federal Cost
of Funds
0.752% 0.761% 1.019%
30-day SOFR (daily value) 0.05000% 0.05000% 0.08667%
FHLB 11th District COF 0.238% 0.263% 0.529%
Freddie Mac
30-yr FRM
2.99% 2.86% 2.81%
Historical ARM Index Data

Slower growth can being lower inflation over time, but we're still dealing with the repercussions of very elevated levels of previous growth and pandemic effects on everything from labor supply to raw materials sourcing. Price pressures and shortages of goods and workers won't get solved overnight or probably even very soon, and the current trend in for interest rates -- one of firm but steady pressure for interest rates -- doesn't yet seem to have fully run its course. As we look into next week, it's likely that we'll see another small climb in mortgage rates; we're gradually approaching 2021 highs, which are less than a tenth of a percentage point above this week's levels. Should we climb above April's high water mark for 2021, headlines will start to blare "highest mortgage rates in more than a year!", but the actual reality is that they will be only about a half-percentage point above all-time lows.

Another move in an upward direction for rates does seem likely next week; we expect to see another 4-5 basis point increase in the average offered rate for a conforming 30-year FRM as reported by Freddie Mac when the next report is released 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 one quarter remains of the year; 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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