Housing Beat: Mortgage Rates Soar While Housing Starts Drop

It was a seesaw week in the U.S. housing market, with mortgage rates taking off like a rocket while housing starts sank like a rock.

On The Mortgage Front: Freddie Mac FMCC reported the 30-year fixed-rate mortgage averaged 5.78% as of June 16, 2022, up from last week when it averaged 5.23%. The 15-year fixed-rate mortgage averaged 4.81%, up from last week when it averaged 4.38%. And the five-year, Treasury-indexed hybrid adjustable-rate mortgage averaged 4.33%, up from last week when it averaged 4.12%.

“Mortgage rates surged as the 30-year fixed-rate mortgage moved up more than half a percentage point, marking the largest one-week increase in our survey since 1987,” said Sam Khater, Freddie Mac’s chief economist.

“These higher rates are the result of a shift in expectations about inflation and the course of monetary policy. Higher mortgage rates will lead to moderation from the blistering pace of housing activity that we have experienced coming out of the pandemic, ultimately resulting in a more balanced housing market.”

The spike in mortgage rates did not damper the level of home loan application activity. The Mortgage Bankers Association’s (MBA) Market Composite Index, a measure of mortgage loan application volume, increased 6.6% for the week ending June 10 compared to the previous week.

The Purchase Index was 8% higher and the Refinance Index was up by 4% — although the latter was also 76% lower than the same week one year ago.

“Despite the increase in rates, application activity rebounded following the Memorial Day holiday week but remained 0.29% below pre-holiday levels,” said Joel Kan, MBA’s associate vice president of economic and industry forecasting. “With mortgage rates well above 5%, refinance activity continues to run more than 70% lower than last year. Purchase applications were down more than 15% compared to last year, as ongoing inventory shortages and affordability challenges.”

On The Housing Front: New data from the U.S. Census Bureau and the Department of Housing and Urban Development reported single‐family housing starts in May were at a rate of 1.05 million, down 9.2% from the revised April figure of 1.15 million. Privately owned housing units authorized by building permits in May were at a seasonally adjusted annual rate of
1.69 million, down 7% from the revised April rate of 1.82 million and a scant 0.2% increase from May 2021.

Housing starts are now at the lowest level since April 2020, right after the pandemic paralyzed the U.S. economy. The decline in privately owned housing starts represents the largest slide since April 2021.

While housing starts were down, foreclosure activity was up. A total of 30,881 residential properties had foreclosure filings in May, according to new data from ATTOM. That represents a 1% uptick from April and a 185% spike from May 2021.

Last month, one in every 4,549 U.S. housing units had a foreclosure filing — defined as default notices, scheduled auctions or bank repossessions. States with the highest foreclosure rates were Illinois (one in every 2,000 housing units with a foreclosure filing), New Jersey (one in every 2,346 housing units), Delaware (one in every 2,426 housing units), Ohio (one in every 2,667 housing units) and Florida (one in every 2,788 housing units).

"While there's some volatility in the monthly numbers, foreclosure activity overall is continuing its slow, steady climb back to normal after two years of government intervention led to historically low levels of defaults," said Rick Sharga, executive vice president of market intelligence at ATTOM. "But with inflation now at a 41-year high, and runaway prices on necessities like food and gasoline, we may see foreclosure activity ramp up a little faster than most forecasts suggest."

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On The Fed Front: The Federal Reserve’s 75 basis point interest rate hike was greeted with cautious concerns by economists within the housing and mortgage banking industries.

“So far, the short-term fed funds rate that the Fed directly controls has risen by 175 basis points, but the 30-year fixed rate mortgage has risen even more – by nearly 300 basis points,” said Lawrence Yun, chief economist for the National Association of Realtors. “On the same $300,000 mortgage, the monthly payment has risen from $1,265 in December to $1,800 today. That’s painful and, consequently, will shrink the buyer pool.”

Mike Frantantoni, senior vice president and chief economist at the MBA, said the Fed is “racing to catch up to economic events” and predicted that a “federal funds target rate likely to reach almost 4% by the end of 2023 should be effective in slowing the economy and ultimately bringing down inflation.” But he also noted the central bank’s impact on the mortgage market.

“The ongoing reduction in the size of the Fed’s balance sheet, including its holdings of mortgage-backed securities, is another factor putting upward pressure on mortgage rates,” he said. “The housing market has slowed considerably over the past month as rate increases have taken hold. We expect that this slower pace will remain through the summer, but buyers could return later this year if the Fed’s plans are better understood by the market and lead to less rate volatility.”

Ruben Gonzalez, chief economist at Keller Williams, noted the mortgage market is already responding to the Fed’s actions.

“Mortgage rates going forward will continue to be responsive to changes in expectations around the Fed’s policy path, as well as inflation expectations,” Gonzalez said. “The housing market is still extremely tight, with inventory levels remaining near historic lows, leaving room for the market to absorb falling demand.”

And Dr. Anthony B. Sanders, chief economist at Artesia Economics, questioned whether the Fed is seeing the bigger picture in its actions.

“The Atlanta Fed’s GDPNow forecast for Q2 was released today at -0.002%,” Sanders opined. “So, what does The Fed do? They raised their target rate by 75 basis points to 1.75% – apparently, the Fed has chosen to fight inflation rather than help the economy. The Fed has chosen poorly.”

Photo: Tumisu/Pixabay.