Mortgage Rates Continue to Inch Up

As expected, mortgage rates continued to inch up but are still hovering around three percent, keeping interested buyers in the market. However, residential construction has declined for two consecutive months and given the very low inventory environment, competition among potential homebuyers is a challenging reality, especially for first-time homebuyers.

Week of March 15, 2021 in Review

Housing, manufacturing and unemployment news all made headlines, as did the Fed meeting and its impact on the markets.

Despite rising lumber prices, homebuilders remain confident per the National Association of Home Builders Housing Market Index, which provides a real-time read on builder confidence. While the index fell 2 points in March to 82, any reading above 50 signals expansion, meaning builder sentiment remains well above that level and still near the highest levels on record. 

Housing Starts and Building Permits (a sign of future construction) for single-family homes both declined from January to February, but this was likely due to inclement weather across the country. Single-family Permits are up 15% when compared to February of last year, which is a good sign that hope is on the horizon for buyers struggling with limited inventory.

There was also some good news from the manufacturing sector, as the Empire State Index (which measures the health of manufacturing in the New York region) and the Philadelphia Fed Index both came in above expectations in March – with the Philadelphia Fed Index more than doubling expectations. Meanwhile, Retail Sales did fall more than expected in February, but inclement weather likely also had an impact on sales and a rebound is anticipated as more people receive stimulus payments.

Unfortunately, however, the unemployment situation remains dire a year into the pandemic. The number of people filing for unemployment for the first time rose in the latest week to 770,000. And overall, 18 million people are still receiving benefits throughout all programs, compared to just 2 million this time last year.

Last but certainly not least, market volatility continues, impacting Mortgage Bonds and the home loan rates tied to them. While Tuesday’s 20-Year Bond Auction was met with above average demand, Mortgage Bonds sold off despite this strong auction, showing underlying weakness in the market. Plus, the Fed held its regularly scheduled meeting of the Federal Open Market Committee, with their Monetary Policy Statement released on Wednesday. More on what they said – and how the markets reacted – below.

Housing Starts Decline But Help Is On the Way

Housing Starts, which measure the start of construction on homes, fell 10.3% in February and 9.3% year over year. Starts on single-family homes were also down almost 9% from January to February and were pretty flat compared to February of last year. Bad weather across the US is the likely culprit for the decline.

Building Permits, which measure future construction, dropped nearly 11% from January to February but they were 17% higher year over year. Permits on single-family homes likewise fell 10% in February but they are up 15% year over year, signaling that help is on the way for the low inventory many buyers are facing.

Also of note, housing units that are authorized but not yet started for single-family homes are up 36% year over year.

Homebuilders Remain Confident Despite Rising Lumber Prices

The National Association of Home Builders Housing Market Index, which is a real-time read on builder confidence, dropped 2 points in March to 82, coming in slightly lower than expectations. However, any reading above 50 signals expansion, meaning builder sentiment remains well above that level and still near the highest levels on record. The main reason for the drop in confidence this month was costs, as rising lumber prices are adding approximately $24,000 to the cost of building a new home.

Breaking down the three components of the index, current sales conditions decreased by 3 points to 87, but given that they were coming off a flaming hot reading of 90, a pullback was expected. Future sales expectations increased by 3 points to 83, and buyer traffic remained stable at 72. 

Remember that not long ago the reading for buyer traffic was below 50, so putting the numbers in perspective, future expectations and buyer traffic remain very strong even with the record low levels of inventory and rising rates we are seeing.

Unemployment Levels Remain Worrying

The number of people filing for unemployment benefits for the first time increased in the latest week, as Initial Jobless Claims reached 770,000. Ohio (+113K), California (+109K) and Illinois (+75K) reported the largest gains.

Continuing Claims, which measures people who continue to receive benefits, was little changed at 4.12 million.

Pandemic Unemployment Assistance Claims (which provides benefits to people who would not usually qualify) decreased by 773,000, while the Pandemic Emergency Claims (which extends claims after regular benefits expire), decreased by 640,000. These figures are volatile each week.

The bottom line, unfortunately, is that new claims are not improving and 18 million people are still receiving benefits throughout all programs, compared to just 2 million this time last year.

Fed Stays the Course

The Fed held their regularly-scheduled Federal Open Market Committee meeting and, despite the volatility in the markets, recent decline in Mortgage Bonds and forecasts for higher inflation, announced that they would not make any changes to their purchases of Mortgage-Backed Securities and Treasuries each month. The Fed noted that they will continue their current pace until seeing actual progress and could use the full extent of their tools should they need to.

The Fed was dovish on the economy, raising their forecasts for growth and inflation for 2021. They believe GDP will reach 6.5%, upgraded from 4.2%, while unemployment will drop to 4.5% by year’s end instead of 5%. They see inflation reaching 2.4%, with Core inflation (which strips out volatile food and energy prices) reaching 2.2%.

Why is higher inflation significant?

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, inflation news is something I will be closely monitoring this spring.

What to Look for This Week

Housing news kicks off the week on Monday when Existing Home Sales for February are reported. February’s New Home Sales follows on Tuesday.

On Wednesday, look for news on February’s Durable Goods Orders. Thursday brings the latest on fourth quarter 2020 Gross Domestic Product, plus Jobless Claims data.

Ending the week on Friday, we’ll get an update on the Fed’s favorite inflation measure when February’s Personal Consumption Expenditures is reported, along with Personal Income and Spending.

Technical Picture

Mortgage Bonds ended the week just beneath the important floor of support at 102.281. While this is not a convincing break lower yet, if one does occur the next floor of support is 101.727, which is almost 60bp lower. Given that Mortgage Bonds have been trending lower and rates trending higher, this is a critical juncture to monitor

Getting away

If you’ve come this far, I’d like you to know that I am an avid motorcycle rider. I plan and ride a couple of long (1500 miles or more) rides per year. My update is late this week because this past weekend I rode to the mountains above Palm Springs, Joshua Tree National Park and Death Valley National Park. California is huge. Once you get away from the coast and the cities, the land opens up wide. When you need to see how small and insignificant the thing that is bothering you truly is, get in a car (or better yet, on a motorcycle) and get out in the countryside of this beautiful state. You’ll find beauty and peace in the strangest places.