- calendar_month December 19, 2022
On Tuesday, the “core” CPI figure (which excludes fuel + food) for November eased to 6.0%. This was modestly lower than expectations, driving a bond market rally that pushed 30-yr mortgage rates below 6.3%.
A day later, the Federal Reserve lifted short-term rates by 50 bps (that’s half a percent). While this was no surprise, the Fed’s forecasts were more hawkish (suggesting 75 bps more to come). After an initial sell-off, bonds rallied again, sending mortgage rates to near 6.1%.
NAR Chief Economist Lawrence Yun now sees 30-yr mortgage rates dropping below 6% by 3Q 2023, a 7% drop in existing homes sold in 2023 (after a 16% drop in 2022), and home prices flat in 2023 (with some markets up and others down). [Source: NAR]
CoreLogic is more bullish, forecasting 4% price growth over the next 12 months. [Source: CoreLogic]
With 30-year mortgage rates down almost 1.25% from their peak (~7.37% on 10/20/22), new purchase mortgage applications have risen week-on-week in five of the last six weeks. Gosh, even refi activity appears to be (slowly) picking up! [Source: MBA]
Redfin estimates that only 3.4% of people that bought homes during the pandemic (2021-Sept 2022) would go “underwater” if home prices dropped 4% in the next year. [Source: Redfin]
NAR Adjusts its Forecasts
Home prices and unit sales have been moving down a bit faster than the NAR expected, so they’ve had to make some (modest) downward adjustments to their forecasts. But they still don’t forecast a decline in median home prices in 2023.
If (like most) you’re experiencing price declines in your home market, you’re probably wondering how the NAR can arrive at these “flat price” forecasts. Here’s how:
- Timing — In the first half of 2022, national home prices were still rising month-over-month. They only started to fall MoM in June/July. While the first few months of 2023 will likely see home prices decline YoY, the NAR expects prices to start rising MoM in the second half of 2023 — enough to bring prices flat YoY.
- Dispersion — “Half of the country may experience small price gains, while the other half may see slight price declines. However, markets in California may be the exception, with San Francisco, for example, likely to register price drops of 10–15%.”
Source: NAR
2022 looks bad, but only compared to 2021
The black line in the chart below is 2021. The lavender line is 2022. The big drop in sales is easy to eyeball — and the gap is widening. October existing home sales were down 28% YoY! It looks and feels like a crash, unless you do what Mike DelPrete suggests and treat 2021 (and the second half of 2020) as an outlier. If you remove 2021 and 2020 from the graph, 2022 doesn’t look nearly as bad. And keep in mind that mortgage rates haven’t been this high since 2008! [Source: Mike DelPrete]
Note: In 2023, existing home sales are likely to move below 5 million units for the first time since 2014. But I continue to believe (and so do most forecasters) that they will move back above 5 million in 2024, and that the annualized pace of monthly sales will exceed 5 million by mid-2023 — especially if mortgage rates drop below 6%.
Source: NAR, Mike DelPrete
Feeling Fed Up?
Hardly anybody was surprised by the 50 bps rate hike. It was expected, so…boring!
But it’s important to remember that in a historical context, +50 bps is large and +75 bps (which the Fed did four times this year) is unusual. So far, the Fed has increased rates by 425 bps in 2022 (that’s 4.25%), and it’s not done yet. This is the fastest pace of increases in 35 years!
You also need to consider how weird the last few years have been. A tech boom, a pandemic, global lockdowns, a massive spike in unemployment, a housing boom, an invasion, a rapid job market recovery, a skyrocketing US dollar, and the highest inflation in 40 years.
The Fed understands that the impact of its tightening policies are lagged (they take time to manifest) and cumulative (they build up), but given the complexity of the situation, it can’t be certain how quickly inflation will fade or how deeply the economy will contract.
Mortgage Market
This was a great week for bonds (prices up) and a great week for homebuyers (mortgage rates down). While the November “headline” CPI was still way too high at 7.1% (the Fed wants 2%!), it was nonetheless an improvement.
Remember: Bonds hate inflation, so…lower inflation → higher mortgage bond prices → lower mortgage bond yields → lower mortgage rates.
Over the course of the week, average 30-year fixed rate mortgages dropped from 6.39% to 6.13%. In less than two months, mortgage rates have dropped nearly 1.25% — saving a homebuyer $250–350 per month.
They Said It
“I just don’t think anyone knows whether we’re going to have a recession or not. And if we do, whether it’s going to be a deep one or not … it’s not knowable.” — Federal Reserve Chairman Jerome Powell.
“If the Fed [would] stop looking at stale housing data — and I don’t know why they don’t — they would actually realize that inflation is over.” — Jeremy Siegel from CNBC interview
Note: The housing (shelter) component of the November CPI rose 0.6%. Professor Siegel called that a “nonsensical” or even “bogus” number. Why? because every home price or rental rate index we look at (NAR, Case-Shiller, Apartmentlist etc.) has been trending down for several months.
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