Why the Fed’s change in timeline affects the housing market

The Federal Reserve will likely begin to taper its bond buying program before the end of the year. As for rate hikes? Don't expect those any time soon. Fed Chairman Jerome Powell spoke from the Fed's meeting in Jackson Hole last week and reiterated that there is "much ground to cover before we reach maximum employment" and that means it will be some time before the central bank can raise interest rates from 0%. The 0% overnight lending rate has been in place since March 2020.

As the country moves through the COVID-19 pandemic, inflation has been the focus of the Fed. Its target inflation rate is 2% and that's where the economy has mainly stayed in recent months. Raising the overnight lending rate is one lever that the Fed can pull in order to cool the economy. However, Powell is not in a rush to make that move and continues to call the current inflation spikes "transitory." 

One of the key measures of inflation followed by the Fed is the core personal consumption expenditures (PCE) index. This data excludes the more volatile goods like energy and food. The Commerce Department reported that July's core PCE rose by 3.6% annually, which was in line with expectations from economists. This was the highest level for that index since 1991. 

Speaking to CNBC, Atlanta Fed President Raphael Bostic said "business contacts in his region have told him they see inflation persisting beyond the near-term time frame."

Since March 2020, The Fed has also continued to make monthly purchases of $120 billion worth of Treasury bonds and mortgage-backed securities. That has helped keep mortgage rates at historic lows. In the recent meeting, Powell said the bank will "likely" start to taper those purchases before the end of the year adding that "the economy has reached a point where it no longer needs as much policy support." Many economists believe that as the Fed starts to taper its purchases, we could see prices on homes start to pull back as mortgage interest rates slowly creep higher. 

Housing market shows signs of settling down

Reports show the industry continues to see a slowdown in purchase activity despite interest rates being nearly equal to what they were a year ago. In fact, Freddie Mac's 30-year fixed-rate mortgage average barely ticked up to 2.87% from the previous week's 2.86%. In the group's research, they note "The tug-of-war between the economic recovery and rising COVID-19 cases has left mortgage rates moving sideways over the last few weeks. Overall, rates continue to be low, with a window of opportunity for those who did not refinance under three percent. From a homebuyer perspective, purchase application demand is improving, but the major obstacle to higher home sales remains very low inventory for consumers to purchase."

Weekly data from the Mortgage Bankers Association shows the purchase index, meaning people who put in an application to purchase a home, was up by just 1% week-over-week but was down by nearly 16% annually. 

Joel Kan, the MBA's Associate Vice President of Economic and Industry Forecasting, noted "The purchase index was at its highest level since early July, despite still continuing to lag 2020's pace. There was also some easing in average loan sizes, which is potentially a sign that more first-time buyers looking for lower-priced homes are being helped by the recent uptick in for-sale inventory for both newly built homes and existing homes.”

The latest data from the National Association of Realtors shows that sales of existing homes were up 2% from June to July and 1.5% annually—the second straight month of an increase for existing home sales. The NAR also noted that the median price for an existing home sale also increased by a staggering 17.8% year-over-year in July, hitting $359,900. 

The NAR's chief economist Lawrence Yun said that "The housing sector seems to be settling down. The market is less intensely heated as before." While Yun notes the market is not as competitive as it was at its peak this year, there is still heavy competition for buying a home. The NAR shows homes are staying on the market for an average of just 17 days.