Last month, March 2022 mortgage rates soared at an unexpectedly fast pace. While many mortgage professionals predicted 4% being the higher year-end rate, at present day, they have already surpassed 5%. Analysts attribute much of the cause to longstanding issues. Throughout the coronavirus pandemic, the Federal Reserve bought mortgage-backed securities and treasuries to support the economic downturn. After the United States experienced a rapid economic rebound, inflation skyrocketed at an uncontrollable pace. Additionally, COVID-19 created a global supply chain issue. This spread throughout many industries, creating massive shortages. As such, the demand for everyday products and materials substantially increased, leading to a rise in costs.
In global news, Russia invaded Ukraine towards the end of February 2022. As the United States and ally nations continue to increase sanctions against Russia, markets witnessed incredible volatility. In response to geopolitical events such as Russia-Ukraine War, investors seek to reduce the level of risk in their portfolios. News alluding to greater Russian military action influenced investors to shift from stocks to relatively safer assets. Because of this, bonds, such as mortgage-backed securities, saw increased demand. Overall, this generates a favorable net effect for mortgage rates.
Federal Reserve Impact on March 2022 Mortgage Rates
One of the primary causes for the rise in March 2022 mortgage rates was the record-setting inflation. While inflation jumped to its highest level since 1982, Federal Reserve Chair Jerome Powell gave testimony to Congress, helping to shape the Fed’s monetary policy stance.
In addition, the Federal Reserve announced their first interest rate hike at their March 16th meeting. This move didn’t surprise anyone as investors anticipated it for months. Now, Fed Chair Powell strategizes to achieve an economic “soft landing” as the Fed’s latest tactical maneuver to combatting inflation.
Fed Chair Testimony to Congress Shapes Policy
Last month, Federal Reserve Chair Jerome Powell gave highly anticipated testimony to Congress. In said testimony, Powell shaped On Wednesday, investor outlook for future Federal Reserve policy. Many investors thought a 50-basis point rate hike remained on the table. However, Powell clearly showed support for raising the federal funds rate by 25 basis points at the March 16th Federal Reserve meeting.
Also, Powell expected the action to be followed by a series of additional 25 basis point increases. Having said that, Powell left open the possibility of larger rate hikes in the future. This depends on whether inflation declines at an expected pace. Moreover, Powell said that the Federal Reserve planned to reduce its massive balance sheet holdings of Treasuries and mortgage-backed securities (MBS) “in a predictable manner.” Asked about the impact of the conflict in Ukraine on the United States economy, he replied that it is “highly uncertain.”
Fed Announces 25-Basis Point Increase at the March 16th Meeting
For months, Federal Reserve officials indicated the need for combatting inflation. Generally, Federal Reserve officials intend to reverse the extremely accommodative policy measures put in place to boost the economy during the pandemic. As expected, the Fed began the process by raising the federal funds rate by 25 basis points. In fact, this occasion marked the first hike since 2018.
Holistically, this approach caught no one by surprise. Instead, investors focused on the projections from officials for the future path of the fed funds rate. On average, officials forecasted six additional 25 basis point rate increases by the end of the year. Nevertheless, six additional increases sit at the high end of investor expectations in tandem with a much faster pace.
Also, investors sought precise guidance on the plans for reducing the Fed Reserve’s massive holdings of Treasuries and mortgage-backed securities (MBS). Despite that, the Federal Reserve only mentioned that the framework may be finalized at May’s meeting. During his press conference following the meeting, Chair Powell emphasized that future policy depends on incoming economic data.
Powell Aims for “Soft Landing”
As the shockingly swift increase in mortgage rates reached the highest levels since early 2019 the Fed Reserve tightened monetary policy to bring inflation back down. Since the start of the year, investors shifted from pricing in roughly three rate hikes of 25 basis points each in 2022 up to the equivalent of eight by year end. Rate hikes may occur in increments of either 25 or 50 basis points at each meeting.
In a speech just days after the March 16th meeting, Fed Chair Powell caught investors off guard by emphasizing the need to aggressively fight inflation. Powell pledged to “take the necessary steps” to get inflation under control. This might mean raising the federal funds rate by more than 25 basis points at a future meeting. Currently, the world faces COVID-related supply chain disruptions, economic uncertainty from the Russia-Ukraine War, and recent COVID-19 outbreaks in China. Powell explained that all three of these facts spurred inflationary pressures. Due to this, timing for economic relief remains uncertain.
Also, Powell directly addressed investor concerns that the Fed might tighten policy too much. Essentially, investors fear that the Federal Reserve’s plan slows down the economy more than necessary to bring down inflation. Overall, investors (and the Federal Reserve) hope for a “soft landing.” For the unacquainted, a soft landing describes tightening the economy just enough to lower inflation without inducing a recession. Powell expressed optimism that the Federal Reserve could achieve a reasonably soft landing. Conclusively, the Federal Reserve’s level of success heavily influences future mortgage rates.
Inflation Achieves Record Alongside March 2022 Mortgage Rates
Investors closely watch the Consumer Price Index (CPI). CPI looks at price changes for a broad range of goods and services. Core CPI excludes the volatile food and energy components and provides a clearer picture of the longer-term trend. In February 2022, Core CPI rose 6.4% higher than a year ago. Not only is this up from an annual rate of increase of 6.0% last month, but Core CPI also achieved its highest level since 1982.
Analysts attribute many reasons to the jump in annual core inflation rate. After its increase from early 2021’s readings below 2.0%, analysts pointed to the tight labor market, strong consumer demand for goods, and supply chain disruptions. Shortages for many items caused enormous cost increases. For instance, used car prices shot up 41% higher than a year ago. Fed officials and economists are still divided about whether the inflation spike will clear up as COVID-induced factors resolve.
Faced with skyrocketing prices and the conflict in Ukraine, the European Central Bank (ECB) made a very difficult decision at its meeting in March. It chose to prioritize lower inflation over economic growth. With the new strategic direction, the ECB announced plans for ending its bond purchase program in the third quarter. Overall, this data comes far earlier than expected. ECB President Lagarde acknowledged that the conflict in Ukraine will have “a material impact on economic activity,” but had little choice in tightening monetary policy to help bring down inflation.
Consumer spending accounts for over two-thirds of United States’ economic activity. Thus, consumer spending reflects economic health. In February 2022, retail sales rose a weaker than expected 0.3% from January. However, the revision of January’s 0.3% to 4.9% offset this shortfall. Despite rising prices, consumer spending stays extremely strong so far this year.
Employment & Manufacturing Impact on March 2022 Mortgage Rates
After employers carried out mass layoffs throughout the early days of the coronavirus pandemic, remote work developed into an employee safe haven. With this revelation, employees gained additional flexibility pertaining to job options. Therefore, the power shifted from employers to employees.
This trend continues with the latest job gains and JOLTS report data. However, wage growth came in lower than expected, despite the massively surging inflation rate. On another note, the manufacturing and services sectors shows signs of expansion, in spite of the continuous supply chain challenge.
Strong Job Gains, Weaker Wage Growth
Last month’s closely watched Employment report revealed strong job gains but weaker than expected wage growth. Against a consensus forecast of 400,000, the economy gained 678,000 jobs in February. The unemployment rate unexpectedly fell from 4.0% to 3.8%.
\Average hourly earnings improved 5.1% higher than a year ago. However, average hourly earnings declined from an annual rate of 5.5% last month, far below the consensus forecast of 5.8%.
JOLTS Report Indicates Labor Market Strength
The JOLTS report measures job openings and labor turnover rates. In general, the latest data showed a very tight labor market. The end of January 2022 saw a massive 11.3 million job openings, down slightly from last month’s record high. Having said that, January’s job openings hovered over 4 million higher than January 2020’s (prior to the pandemic).
A high level of job openings reflects a strong labor market, as companies struggle to hire enough workers with the necessary skills. In addition, a very large number of employees also willingly left their jobs in January. Typically, employees quit if they can find better jobs, indicating a sign of labor market strength.
Manufacturing Still Expanding
A couple of other significant economic indicators released this week from the Institute of Supply Management (ISM) remained at high levels by historical standards. The national service sector index came in at 56.5 and the national manufacturing index at 58.6. Levels above 50 indicate that the sectors are expanding. Readings above 60 are rare.
Real Estate Impact on March 2022 Mortgage Rates
In 2020, the real estate market faced a major economic setback with the onset of the COVID-19 pandemic. However, it rebounded in incredible fashion in 2021. As a matter of fact, 2021 achieved the best year for home sales since 2006.
That said, the market may have finally run out of steam again. As March mortgage rates rose to late 2018 levels, fewer loan applications took place. Beyond that, the housing market grows increasingly competitive as the United States continues to deal with its age-old housing inventory problem.
Existing Home Sales Disappointed in February 2022
Sales of existing homes disappointed in February 2022. The latest report showed that existing home sales dropped 7% from January. The ever-climbing median existing-home price soared 15% higher than last year at this time. As of last month’s data, the median existing-home price jumped to $357,300.
Housing Inventory Fell to Record-Low Level
Inventory levels fell 16% from a year ago. At just a 1.7-month supply nationally, inventory levels fall well below the 6-month supply. Investors consider a 6.0-month supply to be a healthy balance between buyers and sellers. As housing inventory fell to 1.7 months, it hovers near the record-low level.
With the shortage of available homes in many areas, investors closely watched the monthly reports on housing starts. While the most recent housing starts report holding encouraging news, starts unexpectedly increased 7% from January to February. Therefore, housing starts rose to their highest level since 2006. Higher prices and shortages for land, materials, and skilled labor remained obstacles to a faster pace of construction.
New Home Sales Decline Despite Increase in Housing Starts
Sales of new homes declined for the second straight month in February. In conclusion, new home sales dropped 2% from January to an annualized rate of 772,000. This statistics plummets below the consensus forecast of 810,000. Meanwhile, the median new-home price increased 11% higher than last year at this time at $400,600. Inventory levels unexpectedly rose to 407,000 units, the highest level since 2008. Notably, over 90% of those homes were either under construction or not yet started construction yet.
Looking Ahead After March 2022 Mortgage Rates Rise
Looking ahead, investors continue to closely follow news on Ukraine. While Russia progresses in its invasion of Ukraine, the United States and NATO allies apply more sanctions. On the market level, investors shift their assets from stocks to bonds. This market shift led mortgage rates to jump to 5% within the past month.
Beyond that, investors search for clear Federal Reserve guidance on the pace of future rate hikes and balance sheet reduction. As March 2022 mortgage rates hit new highs, the Federal Reserve intends to persist with additional rate hikes throughout the year. Meanwhile, China faces an ongoing COVID-19 spread, furthering the supply chain issue.
Last month, March 2022 mortgage rates soared to late 2018 levels. Never miss an update with MBSQuoteline. To receive by-the-minute updates on mortgage-backed securities, try our platform free for 14 days.
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