The Fed Talks Asset Purchase Wind Down – Real Estate Market Update

Posted On August 6, 2021


by Kevin Graham

While interest rates stayed the same and there was no immediate movement on asset purchases, the Fed did say it was discussing when to back off asset purchases. Because those asset purchases include $40 billion worth of mortgage-backed securities (MBS), the timing and nature of the wind-down could have a huge effect on the housing and mortgage market.

The level of MBS purchases made by the Fed makes it the single biggest player in the market right now. Because the Fed is acting like a big buyer, yields don’t have to be as high to attract purchases. As a result, mortgage rates can be lower. As the Fed slowly begins to step back, rates are likely to push out without someone to fill the void.

No one can say for sure what will happen when rates go up, but there’s a good likelihood that a couple of things will take place. First, home buyers will reassess their budget in light of the new rates because the mortgage payments will be higher. In response, motivated sellers might take a step back from raising prices, causing them to level off.

Because people don’t sell houses every day, there’s also probably going to be a lag between when rates go up and prices come down. Sellers will continue to behave as if the market is the same until it’s otherwise proven. This is where a good real estate agent can counsel patience for a frustrated buyer or gently nudge a seller to reality. Either way, you’re playing an important role as a trusted advisor.

More News You Can Use

As usual, this portion of the report is compiled from analysis by Econoday1. Let’s get into it!

Consumer Price Index (CPI)

Overall inflation was up 0.9% in June, the biggest monthly increase since June 2008. The 5.4% increase since last year is the highest since August of the same year.

Prices for shelter were also up 0.5% in June. This is particularly interesting because this index has lagged behind what we’ve been seeing in the major home price indexes, and it seems like we’re finally seeing major movement.

Retail Sales

Overall retail sales were up 0.6% last month, while they were up 1.3% when vehicles were taken out and finally rose 1.1% when further removing gas. Moreover, there’s some evidence that the economy might be reaching a point of normalcy. Sales were 16.8% higher than in February 2020 prior to the pandemic.

On the downside, sales in housing-related categories fell off somewhere in June. These were down 1.6% for building material and garden equipment. Meanwhile, sales of furniture and home furniture (apparently those are two separate things?) were down 3.6%.

Housing Market Index

In July, builder confidence in the housing market slipped just slightly, down a single point to 80. The traffic of prospective buyers going through the homes was down 6 points at 65, but this is still strong. Meanwhile, single-family home sales were down a single point at 86. However, expected sales over the next 6 months were up 2 points at 81.

New Residential Construction

This report delivers mixed results for those concerned about housing supply issues. Starting with housing completions, these were down 1.4% at a seasonally adjusted annual rate of 1.324 million in June, up 6.1% year-over-year. Single-family completions were down 6.1% at 902,000. Meanwhile, multifamily completions were 416,000.

On the housing starts side, these were up 6.3% at 1.643 million, rising 29.1% on the year. The 6.3% monthly increase was matched by an equal increase in single-family home sales at 1.16 million. There were 474,000 multifamily starts.

Finally, building permits were down 5.1% to 1.598 million, 23.3% higher than this time a year ago. Meanwhile, single-family permits were down 6.3% at 1.134 million. Meanwhile, there were 483,000 permit authorizations for multifamily units in June.

Existing Home Sales

Existing home sales were up 1.4% in June to come in at 5.86 million. This is up 22.9% since last June.

Supply is up 3.3% from May at 1.25 million units. As a result, the supply in the market has gone from 2.5 to 2.6 months, but this is down from 3.9 months in June 2020 and supply remains extremely tight. Also, prices keep rising. The median is up almost $13,000 from May at $363,300.

Low rates are really still supporting higher home prices, but budgets for some may be a bit stretched. It’s going to be important to try to be an amateur psychologist for some of your clients. Patience may be key.

New Home Sales

Just when we get good news on the existing home sales side, new home sales were down 6.6% to 676,000. They’re also 19.4% below where they were in June 2020. The supply of new homes on the market stands at 6.3 months, at 353,000 units, up from 5.5 months in May. This represents a market in balance between builders and buyers.

This market balance appears to have affected prices as well. The median price of an existing home fell 4.96% in June to $361,800. The median price of a new home was for the moment cheaper in June than the price of an existing home. That doesn’t happen very often. Existing home prices will be interesting to keep an eye on going forward.

Case-Shiller Home Price Index

On an adjusted basis, home prices were up 1.8% in May and they rose 2.1% overall on the month. For the year, home prices are up 17%, according to this latest data.

Case-Shiller is a 20-city index that’s based on a 3-month average, so the data may be a little lagging, but unlike the Federal Housing Finance Agency (FHFA) data index, this does look at all home sales in the 20 metropolitan cities covered.

FHFA House Price Index

This index, which tracks monthly price changes for homes backed by conventional loans, was up 1.7% in May and has risen 18% on the year. There are questions as to how much home prices will continue to rise. One thing we know for sure is that the market was burning hot in late spring when these numbers were collected.

Consumer Confidence

Overall consumer confidence was up 0.2 points at 129.1 in July. Better yet, numbers were revised 1.6 points higher. Rising prices also don’t appear to have a dampening effect on buying plans for houses, at least according to this report. That should be encouraging.

Gross Domestic Product (GDP)

In the first official estimate of the second quarter, the economy grew at a rate of 6.5%. Meanwhile, personal consumption expenditures were up 11.8%. However, it wasn’t all good news. Residential investment was down 9.8%, pointing to a slight decline in demand for housing in a normally very strong quarter.

Before assuming weakness in the market though, it’s important to note that this could be more of an indicator of just how bananas demand was for housing in the first quarter. Frankly, for the last year, demand and prices have been B-A-N-A-N-A-S.

Pending Home Sales Index

The number of existing homes under contract for sale was down 1.9% in June to an index level of 112.8. Because this is a leading indicator, it’s likely that existing home sales in July will be down a bit, but we’ll have to wait and see.

Mortgage Rates

While mortgage rate movement was mixed to the end of July, rates are still well below 3% on average. If your clients see a rate they like, make sure you encourage them to take advantage.

The average rate for a 30-year fixed mortgage was up a couple of basis points to 2.8% with 0.7 points paid in fees. This has dipped from 2.99% at the same time last year.

Looking at shorter terms, the average rate for a 15-year fixed mortgage with the same number of points was down 2 basis points at 2.1%. This has fallen from 2.52% last year.

The average rate for a 5-year hybrid, a Treasury-indexed adjustable-rate mortgage with yearly adjustments was 2.45% with 0.3 points paid, down 4 basis points for the week, and has dropped from 2.94% a year ago.

Now that you have the knowledge, go forth and spread it to your clients. Are you looking for information on the status of your clients’ loan process in order to hold their hand and help them gather documentation? Sign up for Rocket ProSM Insight today.

1 Important 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 2021 Econoday, Inc. All rights reserved.


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