Friday Wrap: Historic Fed Move, and Home Prices Rise

Fed Changes Course on Inflation, Rates Expected to Stay Low

The Federal Reserve just made an historic move in its efforts to support the economy. And that move means rates could stay lower, longer.

In a first-ever virtual, public meeting in Jackson Hole, Wyoming, Fed Chair Jerome Powell outlined a new vision for inflation. Instead of a set target range, Powell announced the Fed would look to allow for a range that could go “moderately” beyond the standard 2% target “for some time.” The “average inflation” targeting means the Fed would allow inflation to reach beyond normal in order to spur growth.

Inflation, or lack thereof, was an issue dating back to this time last year as the Fed was battling with keeping the country in the target range. “Many find it counterintuitive that the Fed would want to push up inflation,” Powell said in prepared remarks. “However, inflation that is persistently too low can pose serious risks to the economy.”

Powell also noted a change in verbiage that is subtle, yet extremely important. Regarding employment, The Fed now refers to “assessments of the shortfalls of employment from its maximum level.” Previously, the group used the term “deviations” from the maximum level.

“This change reflects our appreciation for the benefits of a strong labor market, particularly for many in low- and moderate-income communities,” said Powell. “This change may appear subtle, but it reflects our view that a robust job market can be sustained without causing an outbreak of inflation.”

The Fed’s move will greatly affect interest rates beyond just overnight lending rates. Credit cards, which typically hold adjustable interest rates, giving those rates a direct connection to the Fed’s rate. Bankrate.com reports that since the Fed lowered the benchmark to 0% in March, credit card rates have dropped to an average of 16.03%. Furthermore, the average rate on a personal loan is now just over 12%, with interest rates on a home equity line of credit coming in below 5% on average.

Markets jumped on the Fed’s announcement, with the Dow rising 256 points to turn positive for the year. The benchmark 10-year Treasury note yield was trading higher Friday morning at 0.751%.

The Fed’s efforts to buoy the economy during the pandemic crisis resulted in overnight lending rates moving to 0% back in March, along with robust support of the housing market with the purchase of billions of dollars of mortgage backed securities. Until recently, the Fed’s actions were compounded by the CARES Act through the federal government, which directly supported Americans with stimulus checks and unemployment insurance.

This week, 1 million more Americans filed initial unemployment claims. Continuing claims stand at 14.5 million, according to the Labor Department.

A small silver lining is that a good number of states, nearly half, have been approved for the $300 weekly unemployment insurance stipend through the Federal Emergency Management Agency (FEMA). So far, only Texas and Arizona have started fulfilling the payments which were part of a recent executive order by President Trump. One caveat to the plan is that recipients must already be receiving at least $100 per week in state benefits in order to qualify for the federal subsidy. Also, some states are giving more per week while only one state, South Dakota, has declined the option.

Whether or not Congress will be able to come to an agreement on further stimulus before the election is still uncertain. CNBC reports that discussions are deadlocked and the Republican party is working on a much more narrow relief bill. This new plan would cost about $500 billion as opposed to the Democratic push for more than $2 trillion in aid. The Republican plan most notably leaves out stimulus payments for Americans.

Overall, investors are still positive about the remainder of the year. Many expect that, despite the uptick in COVID-19 cases recently, the economy will start to recover more come September. Some groups are also factoring in positive sentiment about potential vaccine approval later this year.

Consumers gave the economy a little bit of a boost in July. According to the Commerce Department, consumer spending increased by 1.9% month-to-month. The data also showed that personal income increased by 0.4%, which was a nice boost after two straight months of decline.

 

Purchasing Power Needed as Home Prices Rise

The Federal Housing Finance Authority made another impactful move this week and extended the moratorium on foreclosures through the end of the year. This would cover the 28 million homeowners who have mortgages backed by Fannie Mae or Freddie Mac. The Department of Housing and Urban Development already extended its moratorium on foreclosures through the end of the year, providing protection for 8 million FHA loan owners.

Homebuyers continue to flood the market, despite the virus, because of the incredibly low mortgage rates. The latest data from Freddie Mac shows the average interest rate on a 30-year fixed mortgage is 2.91%. Those low interest rates, combined with the increased demand for single-family homes outside of urban areas, helped push mortgage applications higher this week. Mortgage applications are 33% higher year-over-year according to the Mortgage Bankers Association. Refinance applications were down weekly, but compared to 2019 are still 34% higher.

Pending home sales were up 5.9% month-over-month, according to the National Association of Realtors. Annually, those sales were up 15.5%. One data point highlights just how stiff the competition is for homebuyers. According to the NAR’s chief economist Lawrence Yun, “Home sellers are seeing their homes go under contract in record time, with nine new contracts for every 10 new listings.”

We talked last week about new home starts surging 22.6% annually. This week’s data shows that sales of newly built homes was a whopping 36% higher year-over-year. That speaks to the lack of inventory in existing homes, but also to the increased purchasing power due to historically low interest rates. Buyers need that power right now considering home prices are gaining steam once again.

The latest Case-Shiller U.S. National Home Price NSA Index shows prices increased by 4.3% annually in June. The median price of a newly-built home sold in July was $330,600. That’s an increase of 7.2% year-over-year.

A new issue has cropped up, however, due to the coronavirus pandemic. And it could push prices even higher. The price of lumber is now up a staggering 100% since mid-April. Many mills shut down in April and May and were not expecting the increase in demand once they reopened. The lumber market has three major indices for growth: current sales conditions, sales expectations and buyer traffic. All three of those have increased significantly with buyer traffic hitting its highest level in the history of the survey. The demand is only going to increase due to the recent natural disaster in Iowa and this week’s hurricane in Texas and Louisiana.

Contributed by Greg Richardson, MAXEX Managing Director

Greg Richardson

Greg Richardson is Managing Director at MAXEX, LLC, based in Atlanta, GA. He has 30 years of experience in capital markets, including trading, banking asset and portfolio management, mortgage banking secondary marketing and accounting. MAXEX is the only platform in the mortgage industry to offer a centralized clearinghouse that enables buyers and sellers to trade anonymously with multiple counterparties using a single standardized