Federal Reserve Holds Rates Steady Amid Slowing Economic Recovery

Posted On February 4, 2021


by Kevin Graham

It’s been a couple of weeks since we last checked out what’s going on in the markets and a lot has happened, but real estate agents can be thankful they’re not stock traders on a wild ride right now. The housing market just keeps humming along. Let’s find out what happened. But first, our top story.

The Big Story

The Federal Reserve met last week and kept short-term interest rates at or near zero in an effort to support the economy. The Fed made some subtle language changes, pointing to a slowdown in the recovery. Like many, the Fed is placing its bets on the vaccine and hoping the rollout can happen quickly in order to kickstart things.

Between that and continued buying of $40 billion worth of mortgage-backed securities (MBS), the actions of the Fed have helped support a favorable mortgage market. When we last wrote this report, rates were touching record lows. Although they bounced up later that week, they came back down and remain at very low levels, according to Freddie Mac.

If you’ve got a client who is sitting on the fence and otherwise ready to buy, but waiting on rates to dip, it’s hard to imagine them getting lower than they are right now. No one has a crystal ball, but with rates down this far, it can’t hurt to take advantage of the market.

Also feel free to tell any past clients who might be looking to refinance. There’s a real opportunity to save money, take advantage of existing equity or both.

Let’s run through what else happened in the last few weeks surrounding housing and everything we care about.

News You Can Use

Our friends at Econoday put together an analysis that aided in this portion of the report.1 Let’s jump in headfirst.

Consumer Price Index (CPI)

Consumer prices were up 0.4% for the month of December and they’ve risen 1.4% overall for the year. Meanwhile, when food and energy were taken out, prices were up just 0.1% and 1.6% since last December.

When it comes to the housing data we care about, the price of shelter was only up 0.1%, which was also the same figure for rent and the assumed rate if a homeowner had to rent a similar space.

Retail Sales

Although retail sales overall were quite dismal, down 0.7% and falling 1.4% when vehicles were excluded, it wasn’t all bad news.

Building materials sales were up 0.9%. This signals continued optimism in the housing market. That should be exciting for those of you who are hoping for more supply to hit the market, benefiting frustrated potential buyers.

Residential Construction

Residential construction is of interest to everyone reading this, but we’ll start with the completed construction to show immediate efforts to correct the market imbalance between builders and buyers in terms of shortage of supply.

Completed units last month were at a seasonally adjusted annual rate of 1.417 million, which is 2.8% higher than the 2019 rate. It’s also a 15.9% increase from November. Single-family completions were at 984,000, up 10.2%. Meanwhile, multifamily completions came in at 422,000.

Looking at the housing starts, these were 7% higher than 2019, finishing the year at 1.38 million roughly on a seasonally adjusted basis. There was a 5.8% uptick in starts from November so that on a seasonally adjusted basis, December’s numbers were 1.669 million. single-family starts were 1.338 million, up 12%. Meanwhile, the number of multifamily units was 312,000.

Finally, permits are the furthest off, but 1.452 million units were authorized in 2020, which was up 4.8% over 2019. In December, overall permits came in at 1.709 million on a seasonally adjusted basis. This was 4.5% higher than November. Single-family authorizations came in at 1.226 million, which is up 7.8% from November. There were 437,000 multifamily units with permits pulled in November.

Existing Home Sales

Coming in at an annual rate of 6.76 million, existing home sales were up 0.7% for the month and 22.2% since last December. Supply could be holding things back at this point as supply is down to an incredibly thin 1.9 months at the current pace of sales. That said, the median price of an existing home was down 0.4% at $309,800.

Even with the drop in resale price, median prices are up 12.9% for the year.

Case-Shiller Home Price Index

The FHFA index and the Case-Shiller Home Price Index have several important differences. While the FHFA index measures the only conventional loans, this one looks at all loan types. It’s a rolling 3-month average, while the FHFA index looks at one month at a time. Finally, while the FHFA index separates the nation into regions, Case-Shiller looks at 20 major cities.

Despite their differences, the two indexes paint roughly the same picture. On an adjusted basis, home prices were up 1.4% on a seasonally adjusted basis. It’s gone up 1.1% overall after the adjustment is taken out in November. The 9.1% pace of appreciation since last November is the highest annual gain since May 2014.

FHFA House Price Index

When looking at conventional loans alone, home prices were up 1% in November and 11% since the same time a year ago. The annual growth rate is the highest ever recorded. Although low rates help, you’ll have to be a key advisor and give your clients guidance about what they can reasonably expect to afford with their budget.

Consumer Confidence

Overall confidence among consumers in January was up 2.2 points to settle at 89.3. But what should be particularly exciting for real estate agents is the fact that there were big gains in homebuying plans. Many of your clients are going to be ready and receptive to what you say. You just need to give a little push in the right direction!

Gross Domestic Product (GDP)

Perhaps the best indicator of a slowing economic recovery is the fact that GDP only went up 4% in an initial estimate for the fourth quarter of 2020. Moreover, consumer spending grew at a rate of just 2.5%.

Some of the best news out of the report came from residential investment which was up 33.5% in the quarter and contributed 1.29 percentage points to the overall GDP. Housing is just continuing its roll.

New Home Sales

Sales of new homes were up 1.6% in December to come in at an annual rate of 842,000. The 3-month average to deal with the volatility of this report shows a 4.5% decline for the month at 873,000, which is the lowest it’s been since July. The good news is the slowing may be helping supply.

Supply relative to sales is at 4.3 months in December, which is low, but looks awesome compared to the existing home sales supply issues. Home prices were up 3.5% to $355,900, which is up 8%. There is some evidence that this number could go even higher because sales are up 15.2% from 2019.

Pending Home Sales Index

Pending home sales were down 0.3% in December. While this does suggest that existing home sales for January will be lower than their current level, the index is still at a very high 125.5. For context, the number of homes under contract for sale are up 21.4% above where they were a year ago.

Mortgage Rates

Although mortgage rates popped up quite a bit a couple weeks ago, they’ve come back down a lot since then. If your clients see a rate they like, making a move might be a good idea.

The average interest rate on a 30-year fixed mortgage with 20% down and 0.7 points paid in fees was down 4 basis points to 2.73%, having fallen from 3.51% last year.

The average rate on a shorter-term 15-year fixed mortgage with 20% down and 0.6 points paid was down 1 basis point to 2.2%, which has decreased from 3% a year ago.

Now that you have this knowledge, go forth and share it with the homebuyers of the world. For even more info for real estate agents, check out Rocket ProSM Insight.

1Important 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 2020 Econoday, Inc. All rights reserved.


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