Economic research

housing finance – Economic Research

What the March Fed statement says:

With inflation concerns in the background, today’s Federal Open Market Committee announced the first increase in the federal funds rate, to a range of ¼ to ½ percent. Today’s rise comes nearly two years to the day after the Fed cut rates to zero and began its final purchases of Treasuries and mortgage-backed securities to help ease the market’s functioning as the coronavirus pandemic spread around the world. Today’s increase in the federal funds rate follows the end of its asset purchase program earlier this month.

The Fed worked to ensure that today’s announcement would not come as a surprise. Although as late as mid-December market expectations suggested better than even the odds of no increase at that March meeting, since then a reassessment has been underway. The acceleration of asset reduction by the Fed in December and the language in its public statements emphasizing above-target inflation and progress against labor market targets prepared markets for increases. rate. In fact, for a brief period in mid-February, investors braced for a bigger half-percentage-point hike today, but amid uncertainty surrounding the impact of the conflict in Ukraine, the Fed pursued a more modest take-off.

It also means mortgage rates have largely adjusted for the first hike, and I don’t expect a spike after the last announcement. Instead, as markets digest the Fed’s updated economic projections, I expect mortgage rates to continue to rise over the coming months, consistent with today’s statement that indicated “appropriate firming in monetary policy stance” and that “the Committee expects to begin reducing its holdings by [assets] at an upcoming meeting. Additionally, there was a dissenting vote, from James Bullard, who preferred a bigger raise of half a percentage point. This is an indication of the desire among the committee to accelerate policy tightening.

Economic projections are little changed, but inflation and the expected political path are both higher:

Along with the policy statement, today’s meeting marked the release of updated economic expectations from Federal Open Market Committee (FOMC) participants. Measures of economic growth and the unemployment rate have changed little since December Fed meeting the only exception being the downward revision to 2022 GDP expectations. However, today’s documents show that Fed members expect more inflation and a slightly higher trajectory for the Fed Funds rate in light of this higher inflation. The new materials expect the fed funds rate to be 1.9% by the end of 2022 and 2.8% in 2023, more than a full point higher than the December 2021 projections for those two years. , at 0.9% and 1.6%, respectively.

Higher mortgage rates could help stifle demand and moderate house price growth

Housing markets have already had to adjust to higher rates as monetary policy expectations have changed and the Fed has scaled back its purchases of mortgage-backed securities. Despite recent volatility, recent mortgage rates are eighty basis points higher than a year ago, and even six months ago, in mid-September, mortgage rates were one percentage point.

Higher rates are eating away at homebuyers’ purchasing power. The increase in monthly mortgage payments for a buyer putting down 20% down on the typical listing for sale is $290 more than this time last year, with about half of the increase due to higher rates and the other half to rising house prices. But individual experience will vary. Buyers who buy more expensive homes or putting smaller down payments will result in larger cost increases.

While these cost increases will make it harder for buyers to submit exorbitant offers on homes for sale, we expect home sales to continue to grow at a relatively strong pace for two reasons. First, the housing market is already in a long-term shortage situation with 5.8 million additional homes needed for families than those built in the last decade. Second, strong demand from young households – more than 45 million of whom are in the prime homebuyer age bracket of 26 to 35 – will mean creative approaches to affordability challenges to meet the basic need for a roof over their heads.

Young households also face high and rising rents, which strongly encourages them to consider home ownership. Meanwhile, a tight labor market can create opportunities by increasing incomes and giving some the ability to negotiate flexible working arrangements so they can broaden their search for housing to more affordable areas that may be more away from the office. As I told CNBC last weekfor many of these young households navigating key life stages, “Now is the right time for them [to buy a home]it doesn’t matter if it’s the right time in the economy.

What the Fed statement means for owners, buyers and sellers:

For homeowners who haven’t refinanced yet, the window is likely closing. Actively looking homebuyers should “reserve” their budgets. In other words, think about the impact of recent increases on the price of finding accommodation and use tools like our mortgage calculator to understand how future rate increases might impact your comfort level with the cost of buying. Potential sellers should consider that buyers may have better buying power earlier in the year when mortgage rates are lower, and if they are selling and buying, that also includes for them, which can mean that registering earlier is preferable. Indeed with our Listapalooza– the best time to put your home up for sale – in about a month, homeowners considering moving still have plenty of time to prepare and register in this seasonal sweet spot if they’re moving soon.

As the chart below shows, mortgage rates do not move in parallel with the fed funds rate. Rather, they move more closely with long-term rates which are influenced not only by today’s short-term rates, but also by the expected path of long-term rates and economic growth. For this reason, longer-term rates had already started to adjust to the next tightening, before today’s hike. Further rate hikes should follow as markets adjust to an assertive Fed in the fight against inflation.

Various interest rates over time