Can Fed rate hike cool housing prices without a domino effect ?
Will housing prices cool off with Fed's rate hike intervention or will it just be a scratch on the surface ?
Before we move to today’s digest, here’s a quick ICE Experience 23 throwback -
We just rounded up our visit to ICE Experience 2023 and were blown by the vibe of the event. Among other things, Vaultedge participated as an exhibitor and had some super interesting conversations with smartest minds in the industry.
We will soon share an event summary report.
For now, here’s some ‘say cheeeze’ moments from the ground.
In this week’s newsletter, we will explore what lies ahead for benchmark lending rates and where are housing prices headed in the coming months.
What’s inside:
Analysts & experts see Fed increasing benchmark lending rates more aggressively than before with an objective of containing inflation within 2%.
Mortgage rates have also risen in tandem, with 30 year fixed rates climbing to 7% - partly due to inflation and partly due to supply side constraint such as housing inventory shortage.
The question is - with housing inventory yet to bottom out and uncertainty around Fed’s next move given the rising concern around SVB & Signature bank meltdown - will housing prices quell by third quarter of this year ?
Here’s a complete low-down 👇
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Mortgage rates are on the rise again - at a much greater pace than anticipated.
As per Freddie Mac Primary Mortgage Market Survey the 30-year fixed loan rose to 6.65% from 6.5% for the week of Feb. 23 - the highest since the week of Nov. 10, 2022, when rates were over 7%.
For the same week, a year ago it was 3.75%.
However, the 30-year fixed rate continued to climb & touched 7.10% for week ended March 2. On similar lines, the 15-year FRM increased 13 basis points to 5.89% during the same period.
The point to note here is that the recent mortgage rate hike is coming after a period of reprieve during the early part of this year when the rates were low due expectations of cooling inflation, lower economic growth and loosening monetary policy.
However, the recent consumer price reports, stronger wages and continued inflation has started pointing in a different direction.
Fed keep a close watch on inflation
Over the last one year, Fed has increased lending rates in four consecutive 75 basis-point hikes, to contain the inflation within 2%. However despite best efforts, consumer prices have been anything but sober. For instance - the personal consumption expenditures index, rose 5.4% for 12 months through January.
Due to this, Fed has been more watchful than ever and in its latest monetary policy reports hinted at its disposition to increase rates further.
In its March 3rd monetary policy report, Fed quoted John Taylor’s “balanced approach rule” and gave a cue that policy rate should be adjusted enough over time to ensure a return to the central bank’s longer-run inflation goal of 2%.
In other words, if inflation continues to persist at current levels, then Fed might go hard on benchmark lending rates.
"The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated.
If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes."- Jerome Powell, chairman of the US Federal Reserve, told the Senate Banking Committee.
Based on these sentiments, analysts expect the Fed to notch up the rates by a half point at its FOMC next meeting later this month, instead of continuing the quarter basis point pace from earlier meetings.
As against earlier estimate of 5.5%, experts now see rates peaking to 5.6% this year.
"This will be a cue for the Fed to start cutting rates aggressively, likely beginning by the end of 2023 and intensifying sharply in 2024, for a total of 200 basis points,"
- Rajeev Dhawan of the Economic Forecasting Center at Georgia State University
Housing prices fall on the cards ?
With mortgage rates in the region of late 6% - early 7 % means that borrowers would want to wait & watch.
According to Lisa Sturvetant, the chief economist for Bright MLS - “At today’s rates, home prices would have to fall by 30% in order for homebuyers who are purchasing the median-priced home to have the same monthly payment they would have a year ago.”
The question is what’s keeping the home prices in the upper circuit despite rate hike ?
While prices are down from their summer peaks and price growth has declined significantly, the median home price nationally is slightly higher than it was at the beginning of 2022. There are two reasons for this price stability—record low inventory and record high equity.
Housing inventory is on a down trend even though overall inventory is higher than last year. Usually, weekly housing inventory bottoms in January and we see a regular rise in the spring and summer, then a fade in the fall and winter.
However, this year we are yet to hit the elusive bottom for seasonal inventory, which traditionally happens in January. Instead, we are now going into the third year in a row when it bottoms out in March or beyond.
According to Altos Research data, housing inventory fell by 11,021 over the last week, which is more than previous week, meaning the downtrend is picking up steam instead of slowing down as we head into March.
Given this trend, buyers are still competing for very few homes in the market which is keeping the prices up.
What’s next ?
On the supply side, as long as housing inventory doesn’t bottom out, prices may still hover in the upper circuit.
On the demand side, Fed rate hike has already set in motion a chain of events.
Bond yields are the highest in over a decade, cost of credit is going up and depositors are getting nervous about liquidity as seen with the meltdown of Silicon Valley Bank & Signature Bank.
It remains to be seen - given the current sentiments amongst depositors & investors, will Fed increase the rate further in its next FOMC meeting.
If it does, then somewhere in coming months we could see housing prices coming down due to convergence of better inventory and quelled consumer prices.
We certainly hope this does not come at a cost of knee jerk reaction from the market and a contagion, spiraling out of control.
For now, we are keeping our fingers crossed.