Volatile March expected to continue; housing reacts to economic shifts
This month we have seen a very bittersweet shift in the mortgage industry as interest rates dropped for the first time in months due in large part to the effects of Russia's invasion of Ukraine. Russia's ongoing assault "spurred an investor flight to quality" according to the Mortgage Bankers Association's chief economist, Joel Kan. This in turn pushed Treasury yields lower thus creating a lower mortgage interest rate environment, only to shift dramatically again and push rates higher over the last week.
The price of oil remains volatile as world economies continue to ban imports of Russian oil which has threatened to severely cut supply. Oil prices did fall back considerably from 30-year highs this past week after Reuters reported Iraq might increase its output if OPEC+ asks the country to do so. Reuters also reported that the United Arab Emirates supports increasing supply to offset the impact of sanctions against Russia. Expect this market volatility to continue as long as Russia continues its war on Ukraine.
The cost of energy was a massive factor in the latest government data report on consumer prices. The Bureau of Labor Statistics reports the consumer price index (CPI) hit a 40-year high of 7.9% year-over-year in February. Energy prices were up 3.5% in February—about a third of the total gain. The cost for shelter was up 4.7% year-over-year. That's its fastest annual increase since 1991.
HOUSING MARKET REACTS TO BRIEF DROP IN RATES
The latest Freddie Mac 30-year fixed-rate mortgage average came in at 3.85% which is the first increase in rates in two weeks. In the first week of March the 10-year note yield dropped to 1.70% and quickly climbed to over 2.0% at the end of the second week of March. The 10-year yield is a traditionally good indicator of mortgage interest rate movement.
Freddie Mac economists noted in their report, "Over the long-term, we expect rates to continue to rise as inflation broadens and shortages increasingly impact many segments of the economy. However, uncertainty about the war in Ukraine is driving rate volatility that likely will continue in the short-term."
Homebuyers took advantage of that short spurt of lower rates as mortgage applications were up by 8.5% for the week ending March 4, according to the MBA's data. However, this is still a far cry from 2021 with refinances down nearly 50% year-over-year and purchases down more than 7%. Keep in mind that 2020 and 2021 were record years for the mortgage industry so this drop in activity is more of a normalization of the market and not a sign of something more foreboding.
Homebuyers are still being confronted with a lot of issues like higher home prices, lack of inventory and volatile interest rates. Rates below 4% on average right now are helpful but it can still be difficult to stomach the high price tag of homes on the market. That is, unless you change your perspective on what it means to buy a home and how owning a home could potentially turn into a solid long-term investment.
A new study released by the National Association of Realtors highlights just how lucrative home ownership can be. The NAR reported "Total housing wealth rose $8.2 trillion from 2010 through 2020, with 6.3 million more new homeowner households. A homeowner who purchased a typical single-family existing home 10 years ago at the median sales price of $162,600 is likely to have accumulated $229,400 in housing wealth."
Over the last two years of historically low interest rates, many homeowners took advantage of their built-up equity and utilized a cash-out refinance. A lot of homeowners took that money to pay off bills or renovate their homes instead of buying new. Cash-out refinances are still somewhat popular, even with slightly higher rates, because home valuations have continue to rise. That is one distinct advantage to owning over renting, because the money you put in via your principal payment is money you could still access via a sale or refinance.
