Mortgage Rates Continue To Rise – Market Update

Baseball season has begun. Just in time, because it looks like the Federal Reserve plans to play hardball with inflation. We’ll go over what that means for mortgage rates and what you can expect if you’re looking to buy or refinance a home later. For now, let’s jump into the key data reports.

Headline News

This portion of the report is supplemented with analysis from our friends at Econoday.¹ Let’s get into it!

Retail Sales

Retail sales were up 0.3% overall in the month of February. When vehicle sales were taken out, they rose 0.2%. If you needed any evidence that gas prices are quite high, consider that when vehicles and gas were removed from the equation, retail sales were down 0.4%. In this data, gas sales were up 5.3% in February.

Vehicle sales were up 0.8% as higher prices related to the chip shortages are making up in dollars what dealers might be losing in volume. The sales of building materials were up 0.9% as people think about home improvements when the weather begins to turn. Meanwhile, restaurant and department store sales were up 2.5% and 1.6%, respectively.

Sales at non-store retailers were down 3.7%. There was an interesting note that this category includes outlets for home heating fuel, and the weather was warmer than expected. Also worth commenting on, January numbers for retail sales were up better than a full percentage point.

Housing Market Index

This index of home builder sentiment fell 2 points to 79 in March and was revised down a single point in February. The expected sales component, which asks builders to try to forecast their feelings on sales 6 months in the future, was down 10 points to settle at 70. There’s probably some worry about the impact of rising rates there.

The current sales index was also down 3 points to come in at 86. Traffic of prospective buyers walking through homes was actually up 2 points at 67 in one positive development. The sentiment will be important to track because any new construction added to the market can only help with a tight inventory situation.

New Residential Construction

On one hand, the number of completed housing units was up 5.9% from where it was in February at 1.309 million annually, but this was down 2.8% from a year ago at this time. Single-family completions were up 12.1% for the month at 1.034 million. There were 266,000 units completed in buildings with 5 or more units.

Housing starts were up 6.8% in February at 1.769 million. This has risen 22.3% from last year. Meanwhile, single-family starts were up 5.7% at 1.215 million with 501,000 multifamily starts.

Building permits were up 1.9% from January and 7.7% above the same time a year ago at 1.859 million. On the downside, single-family permits fell 0.5% at 1.207. Meanwhile, there were 597,000 multifamily permits pulled.

Industrial Production

Industrial production in February was up 0.5% including a 1.2% increase in manufacturing output. Space utilized in factories was up 0.3% from downwardly revised January numbers to come in at 77.6%.

There was a 1.3% rise in production of durable goods and a 1.1% uptick in production of nondurable goods. There was a 3.2% increase in miscellaneous transportation equipment manufacturing that made up for a 3.5% downturn in production of motor vehicles and their parts.

Mining production was up 0.1% while utility production was down 2.7%.

Existing Home Sales

Existing home sales were down 7.2% in the month of February, and they’ve fallen 2.4% when compared to the same time a year ago, settling at 6.02 million units annually. Analysts hypothesize that part of the reason for this is that people bought heavily in December and January to get ahead of potential rate hikes.

Supply continues to be an issue. Although slightly better at 1.7 months in February relative to the pace of sales, the January’s 1.6-month level represented a record low. Homes are selling in 18 days, according to data from the National Association of REALTORS^®. The median price of an existing home was up 2.1% at $357,300. It’s risen 15% since last February.

New Home Sales

New home sales were down 2% at 772,000 on an annual basis. Additionally, January numbers were revised down about 13,000 units. There’s some evidence the higher numbers to end the year had to do with people wanting to lock in lower rates, as they had with existing home sales.

The good news is the supply of new homes on the market isn’t in dire straits like existing homes, as supply is at 6.3 months relative to sales. If anything, the market might be slightly tilting toward buyers. The median price of an existing home was down 6.3% for the month at $400,600, but it’s up 10.7% for the year.

Durable Goods Orders

New orders were down 2.2% in February and fell 0.6% when transportation was excluded. Core capital goods orders were down 0.3%. Expectations had been for a drop of no more than 1.5% overall.

One of the more major issues was a 5.6% drop in orders of transportation equipment. New orders of nondefense aircraft were down 0.3%.

Looking at some of the other key numbers, shipments were unchanged, while both unfilled orders and inventories increased 0.4%.

Case-Shiller Home Price Index

In January, the 20-city index in which Case-Shiller collects data saw home prices up 1.8%. On an unadjusted basis, they were up 1.4% on the month. Overall, home prices are up 19.1% in the last year. This is a 3-month rolling average. Any way you look at it, home price appreciation is incredibly high.

FHFA House Price Index

Unlike the Case-Shiller index, the FHFA index is only based on transactions backed by conforming loans from Fannie Mae or Freddie Mac. It’s also not a rolling average. In January, these prices were up 1.6% and they’ve gone up 18.2% year-over-year.

Consumer Confidence

On the positive side, consumer confidence was up 1.5 points at 107.2. On the downside, numbers in February were revised down almost 5 points.

Digging into the components, assessments of current conditions were pretty positive. The number of people who say jobs are hard to get fell by 2.2% to 9.8%, which is considered extremely low compared to what’s usual for this reading. Meanwhile, 57.2% of people see jobs as plentiful, up almost 4%.

Looking at the future outlook for jobs, fewer people are pessimistic, but the same can be said for optimists, so it’s a little mixed. The exact same situation seems to be playing out between people who think incomes are going to rise in the next 6 months vs. those who think they will fall.

Taking a look at economic expectations, 31.6% of people feel the stock market will be up in the near future, while 39.9% of people think that stocks will be down. It’s a widening of the gap in the wrong direction. Meanwhile, people expect inflation to go up as high as 7.9% over the next year, which is up 0.8%.

Gross Domestic Product (GDP)

In the fourth quarter, the economy grew at a rate of 6.9%, including a 2.5% increase in consumer spending. One negative is that consumer spending has gone down 0.6% in comparison to the last estimate from a month ago.

The good news is that residential investment numbers were definitely upgraded, seeing a 2.2% quarterly increase. Meanwhile, inventories saw a huge growth and contributed to GDP significantly. Meanwhile, net exports really didn’t help things. They pulled down GDP by 0.23%. Government spending was down, which weighed down GDP by 0.46%.

Personal Income And Outlays

Personal incomes were up 0.5% to go along with a 0.2% uptick in consumer spending in February. Overall prices were up 0.6% and have risen 6.4% for the year. Meanwhile, in core categories, prices were up 0.4% for the month and 5.4% compared to the same time a year ago.

Spending on durable goods was down 2.5%, while falling 0.1% for nondurable goods. Services spending was up 0.9%.

Employment Situation

There were 431,000 jobs added to U.S. nonfarm payrolls. While this was below estimates for 490,000 added jobs, the unemployment rate did fall from 3.8% to 3.6%. Moreover, the labor force participation rate was up 0.1% to 62.4%. Of the jobs that were added, 426,000 came from private payrolls, with government adding 5,000 jobs.

Average hourly earnings were up 0.4% and have risen 5.6% on the year. Meanwhile, the length of the average work week went down by 6 minutes to 34 hours, 36 minutes.

Looking at individual industries, 112,000 jobs were added in leisure and hospitality, with 102,000 jobs picked up in professional and business services. Retail added 49,000 jobs, while 38,000 jobs were added in manufacturing.

ISM Manufacturing Index

The manufacturing sector continued to grow. However, it did so at a slower pace in March, down 1.5 points at 57.1. This is actually an 18-month low. There are plenty of concerns over commodity prices given the invasion of Ukraine by Russia. Fuel costs hit everybody.

The new orders index was down 7.9 points at 53.8 while prices paid went up 11.5 points to 87.1. Supplier delivery delays were down slightly to 65.4. It was also good news that the employment index was up 3.4 points to 56.3. That’s the highest it’s been all year.

Mortgage Rates

The Federal Open Market Committee, the group of governors within the Federal Reserve that’s responsible for making decisions on monetary policy, meets regularly. That’s where we get public pronouncements on where the federal funds rate is headed. The rate was recently increased at the March meeting, the first of many rate increases expected.

However, one thing we don’t usually talk about is that the Fed releases minutes from these meetings roughly a couple of weeks after they conclude. This time, we thought we would touch on the March minutes because we got some important details around the discussion and the Fed’s plans for the future.

From these minutes, we see just how badly the Fed wants to get inflation under control. They’re talking about increases of the federal funds rate in 0.5% increments as opposed to the usual quarter-point increments. Raising this rate would make borrowing more expensive for all sorts of things, including mortgages, but it also encourages keeping more money in the bank, which helps control inflation.

The other new detail we got is that the Federal Reserve wants to start its balance sheet reduction as soon as May, which would include selling off $35 billion per month in mortgage-backed securities (MBS). The yields on MBS are directly tied to mortgage rates. The Federal Reserve is currently the biggest holder of MBS, buying aggressively at the beginning of the pandemic.

The Fed’s purchases allowed mortgage rates to be held lower than they otherwise would be because the rate of return doesn’t have to be as high if you know you have a willing buyer. When the Fed starts selling, rates will likely go up because it’s probably going to take higher yields to attract the several investors that will be necessary to make up the volume no longer being purchased by the Fed.

Between increases in the federal funds rate and the disposal of MBS, rates are headed up. As you’ll see in the numbers below, it’s already happening. So where does that leave you as someone who might be looking to buy a home or refinance your current mortgage?

If you’re ready to move forward, lock your rate as soon as possible. If you’re out looking for homes, inventory is tight. We get that. However, work with your Home Loan Expert and your real estate agent to make sure your budget and preapproval are solid. There’s no reason to panic.

According to Freddie Mac, the average rate on a 30-year fixed mortgage was 4.67% last week, with 0.8 points paid in fees. This was up 25 basis points on the week and has increased from 3.18% last year.

Turning to shorter-term mortgages, a 15-year fixed averaged 3.83% with the same number of points paid, up 20 basis points. This has gone up from 2.85% a year ago.

Rounding out the survey, the average rate on a 5-year treasury-indexed, hybrid adjustable-rate mortgage with 0.3 points paid was up 14 basis points to 3.5%, an increase from 2.80% in early April of last year.

We’ve thrown a ton of numbers at you, and I know it’s a lot to deal with. If your brain needs a bit of a break, check out these indoor-outdoor living space ideas. Have a great month!

¹ Important Legal Notice: Econoday has attempted to verify the information contained in this calendar. However, any aspect of such information may change without notice. Econoday does not provide investment advice, and does not represent or warrant that any of the information is accurate or complete at any time. Copyright 2022 Econoday, Inc. All rights reserved.