Recent news reflects stunning growth that made mortgage rates soar in February 2021. Across the country, there continue to be positive signs related to the economy as several states drive reopening efforts.
Job growth saw a recent surge after last spring’s countless layoffs. Inflation is trickling up as well. However, many investors worry about the long-term effects throughout the rest of 2021.
Mortgage Rates Soar After Hovering Near Record-Lows
2021 signalizes an upward path for mortgage-backed securities. As mortgage rates soar, economic reports continue to drive home signs of improvement. February 2021 was no different in this regard.
In addition, Fed officials gave no indication that they intend to attempt to halt the recent rise in yields. As a result, U.S. mortgage rates ended the week at their highest levels in months.
On the investor front, this was a rough outing as they attempt to determine the appropriate level of yields within the current economic environment. Initially, it looked promising when the Fed meeting revealed no policy changes and mortgage rates dropped from their peak.
However, the mortgage rates soared the following day, ending higher than before. This falls in line with the persevering trend of slow (but steady) mortgage rate growth.
Home Sales Fall Despite the Soaring Mortgage Rates
With last spring’s economic shutdown, real estate suffered. That said, home sales bounced back from the shutdown of much of the economy last spring far more quickly than expected. Thus, home sales remain at extremely high levels for many months.
The pace slowed a bit in February, however, mortgage rates soared. Also, many states battled severe winter weather conditions, Texas being chief among them.
On a related note, existing home sales fell 7% from January. Existing home sales dropped more than expected. Ultimately, existing home sales still notched 9% higher than a year ago.
The median existing-home price was 16% higher than last year at this time. In February 2021, the median existing-home price hit $313,000, a new record. Inventory levels declined 30% from a year ago to the lowest since 1982. The number of homes for sale was at just a two-month supply nationally. Notably, a two-month supply is well below the healthy economic balance of a six-month supply.
Construction Pace Declined with Soaring Mortgage Rates
Similar to home sales, home construction also took a hit in February. Poor weather conditions led housing starts to fall 10% from January, which was a larger than expected decline. That said, distortions due to one-time events such as unusual weather provide little information about the longer-term trend. Despite this occurrence, the real estate market has other issues.
Many homeowners, who desire to sell, find themselves stuck between wanting to take advantage of low rates and not being able to find suitable homes due to the lack of home supply. As a consequence, experts are predicting a light spring home-buying season.
This “feverish pitch” of home selling has firmly established a seller’s market and this trend looks to continue into the middle of 2021. Even though we are beginning to see new listings, homeowners sell at a very rapid rate with the average time on market falling to a 38-day average.
This metric dips below 40 again for the fifth time in the last seven months. Concurrently, the fast home sales pace pushed the median price of homes higher. As a result, the median home price grew 69.7% since 2012 in spite of the rising mortgage rates.
Work from Home Stirs ‘Great Reshuffling’ Among Americans
On the contrary, a Zillow survey showed that more than 1 in 10 Americans reported moving in the past 12 months. The survey also shows that millions of additional households could enter the housing market in 2021 as the vaccine is circulated and the economy slowly recovers.
Field experts dub this ‘the great reshuffling’. Many Americans, who now work from home, seek larger homes, and lower prices. This is driving homeowners away from major metropolitan cities, such as Los Angeles, San Francisco, and New York. Conversely, prospective home buyers flock to ‘mid-tier’ cities like Portland, Maine and Austin, Texas.
In general, analysts anticipate a tumultuous spring and summer for the real estate markets as prospective home buyers compete for limited housing inventory amidst rising mortgage rates.
Promising Economic Activity’s Impact on Inflation as Mortgage Rates Soar
Long-term bond yields, including the soaring mortgage rates, climbed roughly 50 basis points this year due to improving economic conditions. With the vaccine rollout and massive government stimulus, the outlook for economic activity looks extremely promising. This means that inflationary pressures might increase.
Chair Powell acknowledged the strength but did not give any indication that the Fed intends to attempt to restrain long-term bond yields. According to Powell, Fed officials recognize that stronger economic activity may lead to “transitory increases in inflation,” but that the central bank will be “patient” before changing monetary policy. Some investors hoped that Powell might indicate that policy changes were under consideration to help contain the rise in long-term yields.
The latest figures revealed that inflation remained at historically low levels. The Consumer Price Index (CPI) is a widely followed monthly inflation report that looks at the price change for goods and services. In February, Core CPI was just 1.3% higher than a year ago, down from an annual rate of increase of 1.4% last month and 2.3% in February 2020.
Despite this tame report, some investors worry that inflation may increase significantly later in the year. As the vaccine rollout progresses, pent-up demand might unleash in hard-hit areas, like travel. This can lead to a spike in prices.
Rising inflation reduces the value of future cash flows from bonds. Due to this, rising inflation maintains an inverse relationship with mortgage-backed securities. Therefore, when inflation goes up, mortgage rates go down.
Banks and Fed’s Response to Future Inflation While Mortgage Rates Soar
These concerns about future inflation due to the soaring mortgage rates have caused global bond yields to climb significantly this year. Two major central banks took different stances on the appropriate policy response.
U.S. Fed Chair Powell acknowledged the strength but did not give any indication that the Fed intends to attempt to restrain long-term bond yields.
By contrast, the European Central Bank (ECB) announced that it plans to increase the pace of bond purchases “significantly” going forward to help stabilize yields and boost the economy.
One reason that the ECB may feel more pressure to loosen monetary policy than the Fed is that the eurozone is projected to grow around 4% this year compared to a much stronger 6.5% estimate for the U.S.
Fannie Mae announced they will limit loan acquisitions secured by second home and investment properties to 7% of total loans. As a result, they have changed eligibility requirements for these types of loans.
In an effort to comply, many lenders announced immediate and significant pricing adjustments for these types of loans. It is expected that others will follow suit.
As expected, the Fed made no change to the federal funds rate. Its statement contained no significant surprises. Notably, the Fed did not give any indication of adjusting its current $120 billion monthly pace of bond purchases.
Federal Funds & the Future of Inflation
In addition, most officials expect that the federal funds rate will remain at current levels, near-zero, through 2023. However, the growth and inflation forecasts from officials were significantly higher than in December. Forecasted median GDP growth for 2021 rose 4.2% to 6.5%. If this comes to fruition, it results in the strongest median GDP growth level in decades Given the increased optimism about the economic outlook, investors closely watch for signs that the Fed will begin to scale back its bond purchases.
Overall, the coronavirus pandemic greatly stifled inflation. Because of the reduced economic activity, inflation declined. This led to record-low mortgage rates. As vaccines roll out and the economy reopens, investors concern themselves with inflation potentially heading higher as mortgage rates soar.
The latest data revealed no signs of this so far, however. The core PCE price index was just 1.4% higher than a year ago. This statistic dropped from an annual rate of increase of 1.5% last month. It is also well below the Fed’s stated target level of 2.0%.
Economy Gains Jobs, Unemployment Falls.
The economy gained a solid 379,000 jobs. In fact, the job growth amounts to roughly double the consensus forecast. The leisure and hospitality sectors showed particular strength. This is quite fortunate since the pandemic hit both sectors particularly hard. In conclusion, unemployment fell from January’s 6.3% to 6.2%.
Average hourly earnings, an indicator of wage growth, fought upwards to an impressive 5.3% higher than a year ago. Regarding analysts, this matched expectations.
The Department of Labor releases the total number of new claims for unemployment insurance each week. The latest reading showed 684,000, the lowest level in over a year. This dwindled significantly from the inflated figures seen during the early months of the pandemic, though unemployment insurance claims remain well above typical 2019 readings. In 20219, unemployment insurance claims however around 250,000. As the economy reopens, jobless claims should continue to decline.
Industry Growth Reports
Job growth reached multiple industries. Noticeably, the service sector saw a surge in jobs. The service sector previously endured a brutal impact from the COVID-19 pandemic. Through the economy’s reopening, several industries are receiving financial relief. Numerous states eased social distancing restrictions by increasing indoor capacities at bars, restaurants, and other leisure and entertainment establishments.
Leisure and hospitality payroll rose by 280,000 in March. This followed a stellar February. While these industries linger well below pre-COVID-19 employment numbers but look to continue to bounce back as the general population returns to work and is less hampered by their local COVID restrictions and regulations.
March Report Results
March reports were also positive with the U.S. economy bringing back more jobs than expected, again. Experts predict this could spur more growth in the coming months and even faster recovery from the pandemic-era economy.
The Department of Labor’s March report listed a gain of 916,000 payrolls (the most growth since August). It also showed a lower unemployment rate than expected and an increase in average hourly earnings.
The Bureau of Labor Statistics credits this influx of hiring to “the continued resumption of economic activity that had been curtailed due to the coronavirus pandemic.” This is mainly fueled by the United States’ quick COVID vaccine rollout. To date, over 30% of the U.S. population received their first vaccine. 16.9% of the population received both vaccinations.
COVID-19 cases continue to rise in some states. However, the population’s confidence in the economy seems to be rising. Many states continue to lift regulations on mask mandates, capacity restrictions on businesses, travel, and more.
Retail Sales Fall Due to Weather
Since consumer spending accounts for over two-thirds of all economic activity in the United States, retail sales data is a key growth indicator. Retail sales displayed extreme volatility during the first half of 2020 due to the pandemic. Later, retail sales held relatively steady each month during the second half.
Volatility has returned during the first couple of months of 2021, however. After soaring an upwardly revised 7.6% in January due to the distribution of stimulus checks, retail sales unexpectedly declined 3.0% in February. This is attributed to the aforementioned severe weather conditions across the country.
However, the long-term outlook reflects positivity in the retail space as mortgage rates soar.
Stimulus Checks Drive a Strong Month
March is expected to be another big month for retail spending as many looked to spend the $1400 stimulus check included in President Biden’s most recent COVID relief package. Not only do many U.S. citizens have their stimulus checks, but vaccination rates also increased potentially driving consumer spending. Some experts say to expect a 10% or more bump in spending.
Businesses expect growth due to other circumstances such as the loosening of COVID regulations on capacity limits, travel, and more.
ISM Reports Show Growth as Mortgage Rates Soar
Two others closely watched reports released contained mixed results. The ISM national manufacturing index rose to 60.8. This result placed ISM national manufacturing above the consensus forecast of 59.0, up from a low of 41.5 in April, and matching the highest level since 2004.
By contrast, the ISM national services index declined to 55.3, well below the consensus forecast of 58.5, and the lowest level since May. Readings above 50 indicate an expansion. The data shows that both sectors are growing but at different speeds.
Though many reports show positives, especially in job growth, many experts remain wary of the impending results of so much economic turbulence as we continue into 2021. With inflation and mortgage rates continuing to be a question mark for the future, MBSQuoteline learns what it can to predict the market in the coming months and years.
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