See what's happening with home values in more than 400 metropolitan areas with HSH's Home Value Tracker, just updated though the second quarter of 2022.

See what's happening with home values in more than 400 metropolitan areas with HSH's Home Value Tracker, just updated though the second quarter of 2022.

Going Up

September 23, 2022 -- As expected, the Federal Reserve this week raised its key policy rate by another 75 basis points, lifting the federal funds rate to a range of 3% to 3.25%. This puts the federal funds rate at its highest level since early 2008, and the central bank signaled that its not nearly done with raising rates.

While the third sizable consecutive increase in the funds rate was widely anticipated and investors were likely well-prepared for it, they don't appear to have been well-prepared for the far more "hawkish" tone emanating from the updated Summary of Economic Projections (SEP). This group of forecasts from 19 Fed members reveals their thinking with regard to economic growth, inflation and levels of unemployment and is coupled with a forecast where each thinks the federal funds rate will likely be at the end of this year, next year 2024 and beyond.

Compared to the last SEP version from June, the September update pointed to a more considerable expected slowing in the economy, from a GDP of 1.7% to just 0.2% by year's end. Such slowing ultimately hurts corporate profits, and therefore stock prices. The forecast also revealed an accelerating uptick in unemployment, from current 3.7% now to 3.8% by January, and then up again to 4.4% by the close of 2023. Observers were quick to point out that such increases in the unemployment rate have rarely occurred outside of a recession. Even as the economy slows and unemployment increases, inflation forecasts for core PCE were lifted, by two tenths of a percentage point from June's expectation of 4.3% to a current 4.5% (as a reference, the August annualized rate was 4.6%), while June's core PCE expectation for 2023 of 2.7% was lifted to 3.1%.

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It isn't expected that inflation will be closing in on the Fed's 2% target until late 2024, when unemployment is forecast to be holding at a 4.4% rate and the Fed expects to be starting to trim interest rates.

It is the near-term outlook for inflation and the federal funds rate that is still upending financial markets. The expected level of the funds rate in June to close 2022 was 3.4%; this was lifted to a median expectation of 4.4%, so with just two Fed meetings (early November and mid-December) the FOMC currently forecasts another 100 basis points in increase between now at late December. That's a considerable increase, and in addition, the outlook for next year adds another (smaller) increase on top of that, putting the funds rate at 4.6% by the end of the year, and 2024 looks to still have a funds rate of close to 4% by the end of that period, too.

All these levels are considerably higher than what was expected just three months ago.

While the markets are roiling at the moment, it's important to remember that these are only educated guesses about the economy and policy levels, not guarantees. It's true that near-term forecasts for rates do have a greater probability of being fulfilled than do those further out on the time spectrum, but even educated guesses can be wrong -- six months ago, these same sets of forecasts called for a funds rate of 1.9% to end the year, core PCE inflation of 4.1% and economic growth of 2.8%. So far, we've had two quarters of negative growth and the present one running a 0.3% rate, core PCE inflation has cooled to 4.6% from well over 5% earlier this year, and the funds rate is already 110-135 basis points higher than where it was forecast to be in March. The point is that forecasts and expectations may be off the mark, for better or worse.

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With that in mind, it's worth pondering whether or not the Fed is using the changes in the September SEP (relative to June) to get the market to take its intentions more seriously.

After the July Fed meeting, Fed Chair Powell noted that FOMC "Participants judged that, as the stance of monetary policy tightened further, it likely would become appropriate at some point to slow the pace of policy rate increases while assessing the effects of cumulative policy adjustments on economic activity and inflation," something reiterated three weeks later when the minutes of the meeting came out. During that period, investors took this as a suggestion that the Fed would soon be done raising rates; longer-term interest rates declined and stock markets rallied. These looser financial conditions were exactly opposite what the Fed has been trying to achieve, and markets were essentially ignoring the message the Fed was trying to impart.

The Chair himself put an end to the "hikes ending soon" line of thinking in an late August speech we dissected in that week's MarketTrends. In the speech, Mr. Powell informed investors that their thinking about inflation and monetary policy had become misaligned with that of the central bank. Since then, major stock indexes have declined by 10% or more and short- and long-term interest rates have increased considerably.

In the new SEP, by collectively lifting their near- and mid-term forecasts for the funds rate to even greater levels (whether independently or collaboratively) it may be that members are trying to keep investors from relaxing financial conditions again before inflation settles further. While Mr. Powell again used the Committee's "appropriate at some point to slow the pace" language again in the prepared remarks that began his latest press conference, he countered this in his response to the first question he addressed, stating "my main message has not changed at all since Jackson Hole [August 26 speech]."

Considering the SEP, the FOMC may or may not actually think it will lift rates as much as another percentage point or more by the end of the year. That said, from the Fed's perspective, it's likely better to have markets think so and keep financial conditions tighter than to have them loosen up again should the inflation and labor market data start to look more favorable this fall.

Since the spring, the Fed has lifted rates by 300 basis points, and while core PCE inflation has slowed a bit, although not nearly as much as it needs to. The effects of higher rates takes time to be fully realized throughout the economy, and we may not even yet be seeing the full effects of the June or especially July hikes, so the chances for more pronounced slowing in economic growth and inflation have likely increased even before September's move, let alone any future increases.

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As last year came to a close, it started to become clear that the latest bout of inflation was turning out to be far less "transient" that was hoped, and long-term interest rate and mortgage rates rose appreciably even well before the Fed first lifted rates back in March. Since then, mortgage rates have only pressed higher, returning to 2008 levels a couple of weeks ago. As you might expect, relentless increases in mortgage rates coupled with equally-relentless increases in home prices have damped the housing market as affordability has been crushed this year.

The latest review of builder moods from the National Association of Homebuilders found them as unhappy as they have been since May 2014, excluding the hard pandemic shutdown months of March and April 2020. The overall Housing Market Index for September posted a value of 46, down another three points and a second consecutive below-par reading. A measure of sales of single-family homes also retreated, easing three points, but remained at a mildly positive 54 for the month, albeit the lowest such figure since June 2014, Builder's outlooks for the next six months continued to darken, with the value of 46 for September the bleakest in 10 years (ex-pandemic), while buyer traffic at model homes and showrooms dropped to 31, lowest in more than eight years if the March-April 2020 figures are excluded.

Builders deeper blues came despite an uptick in homebuilding. Housing starts rose by 12.2% in August to a 1.575 million annual rate, a rebound back to June levels after a soft July. Single-family starts rose by 3.4% to a 935,000 annual rate, while starts for multifamily dwellings bumped 28% higher to a 640,000 annual pace. That said, permits for future building activity dropped by 10% to a 1.517 million annual rate, about a two-year low, with a 3.5% decline in single-family permits and a 17.9% drop in those for multi-unit buildings. We'll find out how sales of newly-constructed homes fared in August next week, but would be surprised to much change in the months-long downtrend.

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Sales of existing homes eased in August, posting a 0.4% drop to a 4.80 million annual pace. This represented a seventh consecutive decline in home sales that started from a 6.49 million annual rate back in January. The August skid was the smallest of the bunch so far. The slight change was enough to hold the inventory of homes for sale at 3.2 months of supply at the present rate of sale, and the 1,280,000 units for sale in August was actually 1.5% lower than July and only on par with year-ago levels, so homeowners may have become a little more cautious about selling amid changing conditions. Home price increases are starting to cool more quickly; the 7.7% increase in the median price of a home sold in August was half the rate seen in February, and the $389,500 selling price was a second consecutive decline from June's record high of $413,800. Asking prices for homes appear to be softening, and some sellers may have to accept lower or fewer offers than they might have seen earlier this year. August existing home sales are reflective of market conditions about 45 days prior, so early- to mid-July in this case. Since then, mortgage rates were slightly lower in August, so there is potential for a little bump in sales for August as a result. We'll get a sense of that when the Realtors report their Pending Home Sales Index for August next week.

The Fed is hoping to see labor market conditions start to loosen. So far, there have only been sporadic indicators of this, such as a slower pace of hiring and somewhat fewer job openings, but the changes have been marginal at best. The unemployment rate has edged higher, but from more folks joining the workforce rather than more folks losing jobs. Initial claims for unemployment benefits popped higher earlier this year but have again faded closer to historic lows than not, and in the week ending September 17, only 213,000 new requests for benefits were filed around the country. Initial claims will have to be rather higher than that -- probably 275,000 or more -- on a regular basis to suggest that the job market is receding. Rather than throwing people off the books, the Fed hopes to diminish the number of unfilled jobs to be closer to the number of available workers, but "soft landings" are difficult to achieve with blunt monetary policy tools.

The Conference Board's Index of Leading Economic Indicators declined for a 6th consecutive month, easing by 0.3% for August. After a soft start to the year for various reasons, the economy did look to pick up just a bit to start the third quarter -- July was somewhat less negative than June, and August somewhat less negative than July -- but there seems to be little economic momentum as the final month of the third quarter continues. The LEI purportedly forecasts economic conditions over the coming months, but probably better reflects conditions in the month in which its components are gathered. Regardless, there's little economic strength reflected here and hasn't been for a while.

Current Adjustable Rate Mortgage (ARM) Indexes

IndexFor The Week EndingYear Ago
Sep 16Aug 19Sep 17
6-Mo. TCM 3.72% 3.14% 0.05%
1-Yr. TCM 3.91% 3.25% 0.07%
3-Yr. TCM 3.76% 3.22% 0.45%
10-Yr. TCM 3.42% 2.87% 1.33%
Federal Cost
of Funds
1.762% 1.508% 0.761%
30-day SOFR (daily value) 2.28403% 2.05765% 0.05000%
Moving Treasury Average
1.372% 1.104% 0.088%
Freddie Mac
30-yr FRM
6.02% 5.55% 2.86%
Historical ARM Index Data

It's not clear why there was an increase in mortgage applications in the week ending September 16, but it may have been a case of borrowers getting in before conditions got any worse. The Mortgage Bankers Association reported a 3.8% overall increase in requests for mortgage credit, lifted there by a 1% increase in those to buy homes. Surprisingly, there was a 10.4% increase in request to refinance existing homes, too, the first positive reading for refis in about six weeks. This came despite another lift in mortgage rates, but if the idea was to get a deal in place before the Fed meeting and possibly even higher rates, that turned out to be a good wager, since rates headed higher this week and will be even higher next week.

Aside from the Fed, other central banks are also aggressively lifting their policy rates, too. Investors across the globe are trying to adapt to quickly-changing policies, threats of local or widespread recession, inflation and the uneasy global political climate. The Fed's continuing large increases in the federal funds rate -- and its faster pace of balance-sheet reduction -- would already likely be sufficient to upend markets, which have shown of late that they are better hearing the Fed's message. Add into the mix the SEPs' more-aggressive near- and mid-term posturing for policy, which seems to have forced another recalibration in markets, and the resulting volatility has been considerable.

Investors are trying to adjust to a climate few have ever seen, and this seems likely to continue for at least a bit. Adjusting to higher rates here and everywhere, and trying to factor for the effects of the Fed leaving more bonds in the market for investors to buy isn't a smooth or simple process. After a rough week, bond yields seemed to settle just a bit on Friday, but at a level well above where they started the period. With that as a backdrop, no one should be expecting to see lower mortgage rates anytime soon, and we are likely to see another sizable increase in the average offered rate for a conforming 30-year fixed-rate mortgage reported by Freddie Mac next Thursday morning.

Volatile markets make forecasting interest rates tricky, but we remain undaunted. Check out our latest Two-Month Forecast for mortgage rates, covering the period through mid-November 2022.

We recently completed a mid-year review of our 2022 Outlook. In it, we have a look at how well or poorly our expectations for mortgage rates, Fed policy, home sales, home prices and more have fared. Some are on track; others, not so much, but have a look for yourself.

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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