Thursday, February 9, 2023

What Interest Rates Are Declining?

 The Mortgage Corner


The average 30-year fixed rate conforming mortgage has declined almost one percent since November 2022 to the current 6.12 percent as of February 2023, per the St. Louis Fed.

The housing sector has been a leading edge of economic recoveries historically, and declining interest rates have led housing recoveries, so we can make an educated guess that a recovering housing and the real estate sector in general is indicating an economic recovery this year.

A leading indicator of home sales is the NAR’s Pending Home Sales survey that measures contracts signed with closings occurring usually in 30 to 60 days.

Pending home sales increased in December for the first time since May 2022 — following six consecutive months of declines — according to the National Association of Realtors press release.

The Pending Home Sales Index (PHSI)* — a forward-looking indicator of home sales based on contract signings — improved 2.5% to 76.9 in December. Year-over-year, pending transactions dropped by 33.8%. An index of 100 is equal to the level of contract activity in 2001.

“This recent low point in home sales activity is likely over,” said NAR Chief Economist Lawrence Yun. “Mortgage rates are the dominant factor driving home sales, and recent declines in rates are clearly helping to stabilize the market.”

Why is this a contra-indicator to rising interest rates engineered by the Fed? Because mortgage loans are longer-term products controlled by bond traders looking at longer-term inflation, which has been declining precipitously.

Retail CPI inflation, for instance, declined from 9 percent to 6.4 percent just since last June. Housing sales will take a bit longer to recover from the December lows, since housing prices are also part of the recovery formula.

And said price increases are returning to a more historical level of +5 percent per annum as well.

Calculated Risk

Per Calculated Risk, Freddie Mac recently reported that its “National” Home Price Index (FMHPI) declined for the seventh consecutive month on a seasonally adjusted basis in December, putting the National FNHPI down 2.5% from its May 2022 peak, and down 5.0% Not Seasonally Adjusted (NSA) from the peak.

Mortgage applications have therefore increased as well. Mortgage applications increased 7.4 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending February 3, 2023.

“Applications rose last week as the 30-year fixed mortgage rate inched lower to 6.18 percent, its fifth consecutive weekly decline. The 30-year fixed rate is almost a percentage point below its recent high of 7.16 percent in October 2022,” said Joel Kan, MBA’s Vice President, and Deputy Chief Economist. “

Both purchase and refinance applications increased last week and have shown gains in three of the past four weeks because of lower rates.

So, it looks like head winds created by the Fed’s rate hikes that brought home sales to their lows in December are slowly turning into tail winds pushing housing sales higher as inflation and longer-term, fixed interest rates continue to decline.

Harlan Green © 2023

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