A few weeks back, the Fed decided not to make any changes to monetary policy, skipping a chance to raise rates even though inflation continues to run well above its stated target. At the same time, Fed members offered up their forward-looking policy forecasts in the form of an updated Summary of Economic Projections.
As recently as June, when the previous SEP was released, members collectively expected to have cut short-term interest rate by a full percentage point by the end of 2024. The fresh September update revealed that only a half-point in cuts was now expected over that time frame, suggesting a slower decline of price pressures. In turn, this meant that rates would be higher for longer, with lower policy rates kicked even further down the road. Spreads for mortgages are high for a number of reasons. Investors likely aren't interested in purchasing MBS, as expectations for an eventual slowdown in the economy threaten to increase risks of delinquency and default. In addition, loans made today probably won't run for very long; today's high rates increase the likelihood that homeowners will refinance in the future -- and probably multiple times -- when mortgage rates eventually return to more normal levels, so future prepayment risks are also elevated.
As recently as June, when the previous SEP was released, members collectively expected to have cut short-term interest rate by a full percentage point by the end of 2024. The fresh September update revealed that only a half-point in cuts was now expected over that time frame, suggesting a slower decline of price pressures. In turn, this meant that rates would be higher for longer, with lower policy rates kicked even further down the road. Spreads for mortgages are high for a number of reasons. Investors likely aren't interested in purchasing MBS, as expectations for an eventual slowdown in the economy threaten to increase risks of delinquency and default. In addition, loans made today probably won't run for very long; today's high rates increase the likelihood that homeowners will refinance in the future -- and probably multiple times -- when mortgage rates eventually return to more normal levels, so future prepayment risks are also elevated.
Sales of existing homes had already settled back to Great Recession levels when mortgage rates were still relatively more favorable, at least compared to now. The National Association of Realtors reported that sales of existing homes declined by 2% in September, sliding to an annualized 3.96 million rate of sale. September closings are reflective of demand in late July and perhaps half of August; this was before mortgage rates kicked over the 7% mark.
On a relative basis, falling demand improved the supply of homes, which ticked higher to 3.4 months of supply at the present rate of sale, but it's not as though a slew of homes to buy came onto the market. The number of homes for sale at the end of September was 1.13 million units, up 2.7% from August but still 8.1% below year-ago levels. Prices have also begun their seasonal retreat; although still 2.8% higher than last year, the $394,300 median price tag of a home sold is trending downward from June's 2023 peak of $410,000. Last year, the seasonal peak-to-trough for home prices saw them drop by 12.7% from June's $413,800 to January's $361,200 -- and a similar decline for this year would put them at about $357,900 by January, provided anyone comes out to buy a home this fall. We'll get a sense of what buyer demand looked like in September when the NAR's Pending Home Sales Index is released next week; August's PHSI showed a 7.1% decline, and improvement in demand in September just doesn't seem likely.
The nation's homebuilders have been benefiting to a degree by the lack of existing homes available to buy. However, builder optimism has waned in recent months and turned down more sharply of late, reflecting strengthening headwinds for potential buyers. The National Association of Home Builders Housing Market Index had declined to its neutral threshold of 50 back in August, retreated further in each of the last two months, and now stands at a value of 40, its lowest mark since January. An HMI sub-measure covering sales of single-family homes declined four points to a sub-par 46, while one tracking expected conditions over the next six months dropped by five points to 44. Homebuyer traffic at model homes and sales offices slumped to 26, down another four points this month. All three subindexes reflect conditions as soft as they were to start the year.
Homebuilder moods darkened even though they were seemingly busier in September. Compared to August, housing starts increased by 7%, rising to a 1.358 million (annualized) pace of construction initiation. Single-family construction rose by 3.2% to a 963,000 annual pace, while multi-family starts kicked 17.6% higher to a 395,000 rate last month. Perhaps reflective of a dimming outlook, permits for future construction declined by 4.4%, landing at a 1.473 million unit rate for September, with single-family permits up a little and multi-unit projects falling off. Higher mortgage rates and still-high home prices are a strong deterrent to buying a home or refinancing. For the week ending October 13, the Mortgage Bankers Association reported a 6.9% decline in overall applications for mortgages, pulled down by a 5.6% drop in requests for funds to buy homes and a 9.9% decline in those to refinance existing mortgages. The MBA also reported that applications for mortgages haven't been this low since 1995, so things are very quiet at lenders these days.
The fact is that much of the damage of higher mortgage rates is already here and with us, and still higher mortgage rates coming at a time of year when sales are already starting their seasonal slowing is less impactful than if they had showed up in the early spring. That said, it does likely push the already relatively few potential homebuyers braving the market off to the sidelines while making it even more unlikely that a homeowner will want to sell their home now, as they would face both high home prices in the market and mortgage rates likely more than double what they would give up. The already quiet housing market seems likely become even more so as the fall unfolds. Treasury yields finished the week prior on a promising note, and we hoped for a small decline in rates; the opposite occurred as things unwound after the strong retail sales report. The "ending the week lower" pattern appears in place again this week as yields have retreated from their highest levels at week's end, at least by a little. Even with this modest fall, the yield on the 10-year Treasury is still nearly a third of a percent higher at the end of the week compared to where it began, and this points to higher mortgage rates again as we start the week. If wouldn't surprise us a bit if the average offered rate for a conforming 30-year FRM as reported by Freddie Mac rose by another 10-12 basis points when the next release comes Thursday at noon.
