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In the month since we last gave an update, a lot has changed. People are suddenly talking about something they haven’t in a while – inflation. Let’s touch on what this means for you and your clients.

The Big Story

The rate on a 30-year fixed mortgage has gone up 27 basis points since this time last month. What’s causing this rapid increase? Well, it’s probably a combination of several things, but many analysts are pointing to the potential for inflation. Let’s analyze that for a few moments.

There’s currently another round of stimulus being negotiated in Congress with a reported price tag of $1.9 trillion as of this writing. The thought is that when combining the effects of the first two stimulus packages and the fact that certain areas of the economy are showing rising prices, such as homes, inflation could be ready to bust out.

The Federal Reserve has also vowed to keep short-term interest rates low for a long time to come. Further, they said they would prefer to have inflation run above 2% for a period of time because we’ve spent so long under the Fed’s 2% price growth target. In this environment, the expectation of higher inflation might be reasonable, but we haven’t seen it yet.

Both the consumer price index and personal income and outlays report have shown inflation to be no more than about 1.5% at the consumer level on an annual basis for quite a while now. The evidence isn’t there right now. However, in the markets, where traders are trying to think ahead and gain an edge, the line between perception and reality is a thin one.

Because bond yields have to go up in order to attract investors when inflation is either real or anticipated, the rate on mortgage bonds has gone up in the past few weeks. In turn, mortgage rates have risen.

While they are higher, rates are great in just about any other historical context. If you’ve got a client on the fence, it would be great to let them know that now is the time.

News You Can Use

Now let’s take a look at some of the key data points driving the markets. As always, this section is put together with the help of our friends at Econoday.1

Consumer Price Index (CPI)

Prices were up 0.3% on the month and 1.4% from the year as of January. When taking out food and energy, prices were flat and the yearly pace of appreciation matched. This is well below the Fed’s 2% target for annual inflation.

Of particular interest to this audience is the fact that prices for shelter were only up 0.1% with matching increases for both rent and the equivalent rent of an owner who would be looking to get the same amount of space. This is interesting because it doesn’t line up with any of the other home price indexes.

Retail Sales

Retail sales were up 5.3% overall last month. Sales of building and gardening supplies for homes slightly underperformed this average, up 4.65%. Still, things are trending in the right direction. It should be encouraging for those of us in real estate.

Housing Market Index

Builders continue to be very confident as the housing market index was up 1 point to come in at 84. Expectations for sales 6 months down the line were down 3 points at 80, but traffic of prospective buyers going through homes was up 4 points at 72.

New Residential Construction

Starting with the thing that makes the most impact on supply, housing completions were up 2.3% at an annual rate of 1.336 million. This is 2.4% above the same time a year ago. On the single-family side, completions were up 10% at 942,000, with 296,000 multifamily residences.

Starts were down 6% to a seasonally adjusted annual rate of 1.58 million. Single-family starts were down 12.2% at 1.323 million. Meanwhile, there were 402,000 multifamily starts.

Finishing with permits, these were up 10.4% at 1.81 million. This included a 3.8% increase in single-family construction departments at 1.269 million, to go along with 557,000 multifamily permits.

Existing Home Sales

Existing home sales were up 0.6% to 6.69 million, which is 23.4% higher than where it was last January.

Supply remains tight at 1.9 months based on the current pace of sales. However, prices were actually down 1.7% last month to a median of $303,900.

Case-Shiller Home Price Index

On a seasonally adjusted basis, prices across this 20-city survey were up 1.3%. Taking out seasonal adjustment, prices were up 0.8% overall and have risen 10.1% since December of last year.

A 3-month average that looks at all home prices, this is the highest the index has been since 6 ½ years ago from an annual appreciation standpoint.

FHFA House Price Index

Unlike the Case-Shiller index above, the FHFA index only looks at purchases backed by conventional loans. Yet, they continue to tell a remarkably similar story of a hot housing market. In December, prices were up 1.1% and they’ve risen 11.4% since last December, which represents a new record for the index that’s been around for 30 years.

Consumer Confidence

Overall consumer confidence was up 2.4 points at 91.3. However, when looking at homes, there was a sizable decline in the survey in those who were looking to buy a home in the next 6 months. It’ll be interesting to see if rising prices continue to have an impact here.

MBA Mortgage Applications

Higher rates are cutting into activity for sure. However, applications to refinance are 50% over this time a year ago and applications to purchase have risen 7%. The average rate for a conforming mortgage is 3.08% with 0.46 points paid for a 30-year fixed with 20% down. The same loan with a jumbo balance was 3.23% with 0.43 points paid.

New Home Sales

New home sales were up 4.3% to a seasonally adjusted annual rate of 923,000. Home prices in January didn’t fall 1.9% to $346,400. This may have helped decrease supply to 4.4 months. While that’s better than the constricted market for existing homes, supply is still very tight.

Pending Home Sales Index

Pending home sales were down 2.8% in January to come in at 122.8. This is a bad sign for the February existing home sales report because this is a leading indicator for that.

Mortgage Rates

If you’ve got clients waiting for rates to drop another 10 basis points, it looks like things are no longer heading in that direction. It would be better to let them know that now is the time to act with urgency if they are otherwise ready.

The average rate on a 30-year fixed mortgage with 0.6 points paid in fees was up 16 basis points to come in at 2.97% last week. This is down from 3.45% last year.

With the same number of points paid, a 15-year fixed mortgage was up 13 basis points to 2.34%, down from 2.95% a year ago.

Finally, the average rate on a 5-year, treasury-indexed, hybrid adjustable-rate mortgage was up 22 basis points to 2.99% with 0.1 points paid, down from 3.2% in late February 2020.

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1 Important Legal Notice: Econoday has attempted to verify the information contained in this calendar. However, any aspect of such information may change without notice. Econoday does not provide investment advice, and does not represent or warrant that any of the information is accurate or complete at any time. Copyright 2021 Econoday, Inc. All rights reserved.

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