December 2021 Mortgage Markets Fluctuate to Cap off the Year

With the United States economy facing a tight labor market, record-setting inflation, and pervasive supply chain issues, December 2021 mortgage markets fluctuated each week. As the dust settled, mortgage rates capped off 2021 slightly higher than they were in the middle of the month.

Inflation Impact on December 2021 Mortgage Markets

As inflation led to fluctuations in December 2021 mortgage markets, investors and analysts heavily concentrated on the impact of the Omicron variant. During the early days of the coronavirus pandemic, inflation plummeted. Additionally, mortgage markets saw little volatility as rates hovered consistently near record-lows.

As the pandemic progressed, the United States economy experienced a faster than anticipated recovery. However, the latest COVID-19 variant, Omicron, seeks to slow down economic growth. With the slower economic growth, future inflationary pressures saw a major reduction temporarily.

Federal Reserve

During his testimony to Congress, the Federal Reserve Chair, Jerome H. Powell, surprised investors with a change in tone regarding inflation. For months, Federal Reserve officials described current elevated levels of inflation as “transitory” due to short-term disruptions caused by the pandemic. However, the Federal Reserve now acknowledges that high inflation may be here to stay for the long-haul.

Fed Chair Powell added insight into the tapering of the Federal Reserve’s bond purchase program. In the early days of the coronavirus pandemic, the Federal Reserve purchased numerous bonds to sustain the United States economy. At the time, this policy was extremely accommodative to aiding the United States economy in the recovery process. However, with inflation on the rise, Fed Chair Powell now suggested that it may be appropriate to taper (scale back) the massive bond purchase program at a faster pace than announced at the last meeting.

Currently, inflation runs at the highest levels in decades. Thus, the Federal Reserve went on to announce that it plans to remove those measures at a quicker pace. First, The Federal Reserve intents to double the pace at which it scales back its bond purchase program. Investors anticipate that the bond purchase program will conclude around March or April of 2022. In addition, officials forecast three planned increases to the federal funds rate prior to the end of 2022. Beyond that, the Federal Reserve has three additional federal funds rate increases in mind for 2023.Because the added demand from the Federal Reserve reflects positively for December 2021 mortgage markets, these comments left a negative impact on mortgage rates.

European Central Bank

By contrast, the European Central Bank (ECB) announced in December that it plans to tighten monetary policy more slowly than expected. Similar to the Federal Reserve, the European Central Bank implemented several different bond purchase programs in 2020.

Originally, the European Central Bank intended to end its bond purchasing by early 2022. Now, the European Central Bank aims to extend the program least through October 2022.

Consumer Price Index

Investors widely follow the monthly Consumer Price Index report (CPI). The Consumer Price Index looks at the price changes for a broad range of goods and services. Overall, the latest inflation data came in right on target, causing little reaction in mortgage markets. However, this news moved mortgage rates a little higher by the end of its release week.

Meanwhile, Core CPI excludes the volatile food and energy components. Also, Core CPI provides a clearer picture of the longer-term trend. In November 2021, Core CPI rose 4.9% higher than a year ago. Not only did Core CPI climb from an annual rate of increase of 4.6% in October 2021, it reached its highest level since 1991.

Overall, many factors contributed to the rise in the annual core inflation rate. To facilitate its jump from readings below 2.0%, the United States combatted a tight labor market, strong consumer demand for goods, rising energy prices, and supply chain disruptions. Throughout the coronavirus pandemic, various economic sectors faced supply chain shortages. Therefore, many items saw enormous cost increases. For instance, the price of used cars skyrocketed 31% higher than a year ago.

Fed officials and economists conflict about the net cause for the recent inflation spike. Some economists believe that temporary, coronavirus-induced factors led to the rising inflation. Having said that, many other economists believe that inflation is here to stay, resembling long-term, structural change. Unfortunately, the latest incoming data tilted more toward the latter case. Therefore, numerous investors pulled forward the expected timeline for Fed rate hikes. Many anticipate the first Federal funds rate hike to take place around May of next year.

Core PCE Price Index

Later in the month, the Core Personal Consumption Expenditures Price Index (Core PCE) came out. The Fed favors the Core PCE data as its go-to inflation indicator. In addition, Core PCE came out during the last two weeks of 2021. Typically, mortgage markets demonstrate plenty of volatility during the final two weeks of the year due to the reduced trading volume.

In November 2021, Core PCE increased 4.7% higher from the year before. Also, Core PCE improved from 4.2% in October 2021. Due to these results, Core PCE achieved the highest annual rate since 1989. Looking towards the new year, investors wonder how quickly inflation will moderate as pandemic-related disruptions clear up.

Consumer Spending Impact on December 2021 Mortgage Markets

Heading into the holiday season, analysts paid close attention to consumer spending. Overall, consumer spending accounts for over two-thirds of economic activity in the United States. Thus, the retail sales data represents a key growth indicator for investors and economic analysts.

In October 2021, retail sales jumped a massive 1.7% from September, far above the consensus forecast. However, sales rose just 0.3% in November 2021, well below expectations. Many economists predicted an impact due to shortages of a wide range of consumer products.

Economists anticipated that between the supply chain issues and COVID-19, consumers would start doing their shopping earlier than usual. The latest data suggested that the economists held the right prediction. However, looking at the two-month consumer spending data holistically, the 2021 holiday season showed strong retail sales results.

Housing Data Impact on December 2021 Mortgage Markets

In the housing sector, December 2021 saw a major announcement from the Federal Housing Finance Agency (FHFA). Last month, the Federal Housing Finance Agency (FHFA) announced a planned increase in the baseline conforming loan limit for Fannie Mae and Freddie Mac mortgages in 2022. With this increase, the baseline conforming loan limit extends by 18% from $548,250 to $647,200. The prior year, the Federal Housing Finance Agency increased the baseline conforming loan limit by 7.5%.

For most high-cost real estate markets, the new limit increases by 150% from $647,200 to $970,800. After an abysmal 2020 real estate year, 2021 bounced back in a big way, demonstrating continual strength in the housing market. Also, home values continue to rise heading into 2022. Thus, 2022 marks the sixth consecutive year of increases.

Housing Starts

To date, many regions throughout the United States face an ongoing severe need for a larger inventory of homes for sale. Because of this, investors concentrated more on the monthly report on housing starts. In conclusion, the latest report revealed encouraging information.

In November 2021, overall housing starts far exceeded expectations with an impressive 12% increase from October. Therefore, housing starts hit their highest level since March 2021. Both single-family and multi-family units displayed strength.

On the construction front, building permits posted a solid gain of 4% from October 2021. Building permits represents a leading indicator of new housing inventory. However, the sector still maintains its age-old issues. The United States real estate market confronts rising home prices, alongside a lack of skilled labor. It is also worth noting that American real estate suffers from shortages of materials and land.

Home Sales

The November 2021 home sales data showed a track record of success. Heading into the end of 2021, home sales stayed on track for their strongest year since 2006. Sales of existing homes in November rose modestly from October to the best level since January.

The median existing-home price boosted 14% higher than last year at this time at $353,900. Concurrently, inventory levels declined 13% from a year ago. Inventory levels clocked in at just a 2.1-month supply nationally. Analysts consider a 6-month supply to be a healthy balance between buyers and sellers. As with housing starts, the National Association of Realtors confirmed that supply-chain disruptions and labor shortages remained significant obstacles to a faster pace of home construction.

Looking towards the future, the rising home prices and investor-induced competition create barriers to entry for first-time home buyers. Analysts especially noticed this trend at the lower end of the housing market. In fact, first-time home buyers made up just 26% of November 2021 home sales. This statistics plummeted from 32% a year ago, bottoming out at its lowest level since 2014. Cash sales accounted for about 24% of the total, up from 20% last year at this time.

Employment Report Impact on December 2021 Mortgage Markets

Job Gains

Closing out December 2021 data, the Employment report represented the most highly piece of information for the month. However, the Employment report showed mixed results for the labor market. Against a consensus forecast of 550,000, the economy added just 210,000 jobs in November 2021. This number declined from job gains of over one million just a few months ago in July. Having said that, the professional and business services sectors reflected particular strength. Simultaneously, the retail sector lost jobs despite the pending holiday season.


Despite the big miss in job gains, however, the unemployment rate declined from 4.6% to 4.2%. Thus, the unemployment rate fell far below the consensus forecast of 4.5%, achieving its lowest level since February 2020. These two components often paint a somewhat different picture. The job gains figures stem from company-reported data. Meanwhile, surveyed individuals make up the unemployment rate data. That said, December’s Employment report showed an incredible disparity between the two.

The Department of Labor releases the total number of new claims for unemployment insurance each week. The latest reading stayed at just 184,000. This signifies the lowest level since 1969. Additionally, unemployment insurance claims declined from elevated figures in the millions seen last spring during the partial shutdown of the economy.


The JOLTS report measures job openings and labor turnover rates. In general, the latest Job Openings and Turnover Rates data indicated that the labor market remains very tight. At the end of October 2021, the economy faced a massive 11 million job openings. Not only did this number near the recent record-high, it increased by about 4 million more than January 2020 (prior to the coronavirus pandemic).

Analysts see a high level of job openings as an indicator for a strong labor market. This is because companies struggle to hire enough workers with the necessary skills. On a related note, a very large number of employees willingly left their jobs in October 2021, dubbed ‘The Great Resignation’. Analysts also view this as a sign of labor market strength. Usually, people only quite their job if they expect to find a better one.

Looking Ahead After December 2021 Mortgage Markets

In conclusion, the last couple of weeks of December typically exhibit very light trading volume and limited investor reaction to economic news. This year was no exception. Mortgage rates ended a little higher than they were in the middle of the month.

Looking ahead to the New Year, investors closely follow news on the Omicron variant. Investors also look for additional Federal Reserve guidance on the pace for tapering bond purchases and the timing for its pending future rate hikes.

With the repercussions of December 2021 mortgage markets, 2022 mortgage-backed securities are set for an interested year. To receive by-the-minute updates on mortgage-backed securities, try MBSQuoteline free for 14 days.

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