Housing demand stays consistent despite rising rates, slow-growth economy
Economic growth slowed considerably in the third quarter of this year, gaining just 2% according to the Commerce Department's latest report. Back in July, economists had initially expected a gain of 7% which was continually revised lower due to obvious issues with the supply chain and the slowed pace of job growth. One of the more concerning pieces of the report detailed that consumer spending, which makes up nearly 75% of the country's economy, slowed to a pace of 1.6% growth—markedly lower than Q2's 12% increase. That can be connected to the end of federal stimulus checks for unemployment which resulted in decreased personal income.
Inflation is still a key concern for the Federal Reserve although some recent data shows it might be tapering, albeit slowly. The core personal consumption expenditures index (PCE) is a key piece of data the Fed uses to measure inflation. The index shows how much Americans are paying for everyday items with the core index removing the more volatile components like energy and food. The latest core PCE showed a rise of 4.5%—which is still much higher than where the Fed would like for it to be but also much lower than the previous quarter's 6.1% increase.
While the Fed has made its bond purchase tapering plan fairly clear, its decision about raising the overnight lending rate has been less so. Economists, however, are banking on the Fed taking a much stronger approach much faster than the central bank has indicated. Currently the Fed has indicated just one rate hike in 2022. A report from CME group shows traders have already priced in a 65% chance of a rate hike in June 2022 with a second in September and yet another move in February 2023. Remember the overnight lending rate set by the Fed does not directly impact your mortgage rate. This is the interest rate that determines what banks pay when they borrow money and is usually reflected in a consumer's interest rate on credit card purchases.
The Federal Open Market Committee's next meeting is set for Nov. 2-3 and all eyes will be on the FOMC to see if the group will give a more firm plan for both tapering bond purchases and raising interest rates.
Purchases still in demand
Despite the more muted outlook for economic growth, the housing industry continues to see demand despite high home prices. What is interesting is that a recent report from Redfin shows bidding wars between buyers have started to decrease. September showed the fifth-straight month of decline in percentages of home offers that faced competition. April was the peak of the competition with nearly 75% of home offers involved in a bidding war. September was down to 58.9%. While still high, the downward trend might signal a change in home price acceleration that has added to issues for many buyers.
Part of the reason for decreased competition is likely also due to rising interest rates. The latest data from Freddie Mac shows rates for a 30-year fixed-rate mortgage increased to 3.14% on average. Rates dropped briefly in the first week of October but have been slowly climbing for the past three weeks and are expected to continue on that trajectory.
Freddie Mac economists noted that, "The yield on the 10-year Treasury note has been trending up due to the decline in new COVID cases, increasing consumer optimism, as well as broadening inflation and persistent shortages. Mortgage rates are also rising, but purchase demand remains firm, showing that latent purchase demand exists among consumers."
We regularly discuss interest rates in this report that are an average of 30-year fixed-rate mortgages. It's important to remember that there are options away from a 30-year fixed-rate mortgage that can come with a more attractive interest rate but a shorter term and potentially higher monthly payments, like adjustable-rate mortgages. Most people are unaware of the various loan types and terms available to them, which is why it's extremely important to discuss your options with a Movement loan officer before you start looking for homes.
