U.S. 30-Year Mortgage Rates Hit The Highest Since August 2020
US 30-year mortgage rates rose for the second straight week. According to Freddie Mac, the 30-year fixed-rate mortgage averaged 2.97 percent for the week ending February 25, 2021 (highest level since August 2020), up from last week when it averaged 2.81 percent. A year ago at this time, the 30-year FRM averaged 3.45 percent.
Over the same period, the report also showed the 15-year fixed-rate mortgage averaged 2.34 percent (highest level since November 2020), up from last week when it averaged 2.21 percent. A year ago at this time, the 15-year FRM averaged 2.95 percent.
In this context, Sam Khater, Freddie Mac’s Chief Economist noted “Though rates continue to rise, they remain near historic lows. However, when combined with demand-fueled rising home prices and low inventory, these rising rates limit how competitive a potential homebuyer can be and how much house they are able to purchase.” As a matter of fact, earlier this week, U.S. home loan purchase applications fell for the third straight week, reaching a 9-month low.
US 30-year mortgage rates have steadily declined since mid-2018 and reached record low levels in late 2020. However, the recent spike in Treasury yields — partly explained by stronger growth and inflation prospects — could mean that the bottom is now behind us.
Yesterday, Mortgage News Daily reported that “Most any mortgage lender added another eighth of a percent to their 30yr fixed rate offerings. Over the course of the past week, most lenders are .25-.375% higher. And compared to the beginning of last week, many lenders are a full HALF POINT higher. In other words, what had been 2.75% is now 3.25%. What had been 2.875% is now 3.375%.”
Optimism continues as the economy slowly regains its footing, thus affecting mortgage rates. Though rates continue to rise, they remain near historic lows. However, when combined with demand-fueled rising home prices and low inventory, these rising rates limit how competitive a potential homebuyer can be and how much house they are able to purchase.
Week of February 22, 2021 in Review
Initial Jobless Claims declined by 111,000 in the latest week, as another 730,000 people filed for unemployment benefits for the first time. Unfortunately, this decline is likely due to the inclement weather conditions across the US, and especially in Texas, and not to any real improvement in the labor sector. In fact, there were 19 million weekly claims filed for benefits in all programs for the week ending February 6, an increase of 700,000 from the previous week. By comparison, there were just 2.1 million weekly claims filed for benefits in all programs in the comparable week in 2020.
The housing sector continues to lead our economic recovery, as sales of new homes were up 4.3% in January, which was double market estimates. This is especially impressive given that inventory of new homes was down 6%. Pending Home Sales, which measure signed contracts on existing homes, did fall 2.8% in January but sales were still 13% higher than the same time last year. Again, given that inventory of existing homes was down 24% annually, the level of sales certainly speaks to the high demand for homes nationwide.
This high demand has helped home prices continue to appreciate. The Case-Shiller Home Price Index, which is considered the “gold standard” for appreciation, reported its biggest annual national gain in seven years, with prices up 10.4% in December. The Federal Housing Finance Agency (FHFA) also released their House Price Index, which measures home price appreciation on single-family homes with conforming loan amounts. And the FHFA data came in even stronger, with home prices up 11.4% year over year in December.
Fed Chair Jerome Powell spoke in front of Congress and noted, “The economy is a long way from our employment and inflation goals, and it is likely to take some time for substantial further progress to be achieved.” He also reiterated that the Fed is not fearful of inflation.
Speaking of inflation, the Fed’s favored inflation measure, Personal Consumption Expenditures, showed inflation remained tame in January. Read on to learn why rising inflation (or even the fear of it) can have such an impact on Mortgage Bonds and home loan rates, which are tied to them.
Looking Past the Headlines on Initial Jobless Claims
Another 730,000 people filed for unemployment benefits for the first time in the latest week, which was a decrease of 111,000. However, this drop is likely due to the weather conditions across the US, and especially the crisis in Texas last week, and needs to be taken with a grain of salt.
Continuing Claims, which measures people who continue to receive benefits, decreased by 101,000 to 4.4 million. Pandemic Unemployment Assistance Claims (which gives individuals benefits who would not usually qualify) decreased by 167,000, while Pandemic Emergency Claims (which extends claims by 13 weeks after regular benefits expire) increased by 1 million to the highest level since the pandemic began.
The total number of continued benefits in all programs for the week ending February 6 was 19 million, an increase of 700,000 from the previous week. By comparison, there were 2.1 million weekly claims filed for benefits in all programs in the comparable week in 2020.
The bottom line is that, despite the headline drop in Initial Jobless Claims, unfortunately the unemployment picture has not really improved because that drop was likely due to bad weather and power outages preventing people from filing. In addition, the total amount of people receiving benefits worsened and increased. We still have a long way to go to return to pre-pandemic levels of unemployment.
New Home Sales Beat Expectations
New Home Sales, which measure signed contracts on new homes, were up 4.3% in January, which was double market estimates. But that doesn’t tell the whole story. December’s sales figure was revised much higher and factoring in this revision, sales are up 10% in January. Sales are also up over 19.3% when compared to January of last year.
The strong level of sales is especially impressive, given that inventory is down 6% with just 307,000 new homes for sale at the end of January, which represents a 4-month supply at the current sales pace.
The median home price was reported at $346,400, up 5.3% year over year. Remember this is not the same as appreciation. It simply means half the homes sold were above this price and half were below it.
Low Inventory Impacts Pending Home Sales
Pending Home Sales, which measure signed contracts on existing homes, fell 2.8% in January. However, they are up 13% compared to January of last year. This is pretty amazing in the face of record-low inventory levels of existing homes, which are down 24% annually.
Lawrence Yun, Chief Economist for the National Association of REALTORS, noted that, “Pending home sales fell in January because there are simply not enough homes to match the demand on the market.” But he added, “That said, there has been an increase in permits and requests to build new homes.”
Appreciation Shows Housing Remains Hot
The Case-Shiller Home Price Index, which is considered the “gold standard” for appreciation, reported its biggest national gain in seven years. There was a 10.4% annual gain in home prices nationwide in December, up from an already strong reading of 9.5% in November.
The 20-city index rose from 9.2% to 10.1% year over year, with all of the cities showing strong gains. Phoenix (+14.4%), Seattle (+13.6%), and San Diego (+13%) reported the highest annual gains among the 20 cities.
The Federal Housing Finance Agency (FHFA) also released their House Price Index, which measures home price appreciation on single-family homes with conforming loan amounts. Note that while you can have a million-dollar home with a conforming loan amount, the report most likely represents lower-priced homes, where supply is tightest, and demand is strongest.
As such, it should be no surprise that the FHFA House Price Index came in even stronger than the Case-Shiller Report. Home prices rose 1.1% from November to December and are up 11.4% year over year, higher than the 11.0% annual gain FHFA reported in November.
Inflation Tame in January
The Fed’s favored measure of inflation, Personal Consumption Expenditures (PCE), showed that headline inflation was up 0.3% in January, which was in line with expectations. Year over year, the index increased from 1.3% to 1.5%, as expected.
Core PCE, which strips out volatile food and energy prices and is the Fed’s real focus, was up 0.3% in January, which was hotter than the 0.1% rise anticipated. Year over year, Core PCE increased from 1.4% to 1.5%, which was slightly higher than market expectations of 1.4%.
Even with the Core rate coming in a bit hotter than expected, these levels show that inflation remains tame.
Why is tame inflation significant?
The massive stimulus plans have been causing fears of inflationary pressure. Even the hint or fear of inflation can cause Mortgage Bonds to worsen, which we’ve seen recently as they have fallen precipitously.
Remember, inflation is the arch enemy of Mortgage Bonds and home loan rates, which are tied to them. This is because inflation reduces the value of fixed investments, like Mortgage Bonds. Rising inflation (or even the fear of rising inflation) can cause Mortgage Bonds to worsen or move lower. Home loan rates are inversely tied to Mortgage Bonds, so when Bonds worsen home loan rates can rise, which has been the dynamic we’ve seen in the markets recently.
Though many factors influence the markets, it’s especially important to monitor all the latest inflation news and data and its impact on the markets.
What to Look for This Week
Manufacturing news kicks off the week on Monday with the ISM Index for February. Then labor sector data will dominate the rest of the week, beginning Wednesday with the ADP Employment Report, which will give us an update on private payrolls for February. On Thursday, the latest weekly Jobless Claims figures will be reported as usual. Friday brings the highly anticipated Bureau of Labor Statistics Jobs Report for February, which includes Non-farm Payrolls and the Unemployment Rate.
Mortgage Bonds were able to climb back above the 100.133 Fibonacci Level after tame inflation data. Mortgage Bonds may have found a bottom, as the candle pattern that formed after a big downtrend is a bullish engulfing pattern and portends higher Mortgage Bond prices ahead. In addition, Bonds have been oversold and now it appears there is a positive Stochastic crossover, which is also a good sign for Bond prices. The 10-year held at 1.60% and is remaining below 1.50%.