Party over! US mortgage rates are rising again.
I’m just joking. Well, rates did rise over the last week, according to the latest figures from Freddie Mac, but at “just” 6.12%, they’re still some 90bps from the highs seen three months ago.
Note the scare quotes around “just.” This really all depends on your historical lookback or, more simply, your age. If you’re young, 6% probably seems onerous. If this isn’t your first rodeo, current financing costs are hardly anomalous.
The uptick, as reported in Freddie Mac’s weekly release, was the first since early January. Far more important than the meaningless three basis points was the full percentage point decline that unfolded virtually uninterrupted over the previous 14 or so weeks.
Sam Khater, Freddie Mac’s Chief Economist, said Thursday that with rates hovering close to 6% “interested homebuyers are easing their way back to the market just in time for the spring home-buying season.”
Refis rose 18% last week, and mortgage applications jumped more than 7%, the MBA said Wednesday. Joel Kan, MBA’s VP and deputy chief economist, called that “a step in the right direction.” Maybe. But it depends on your perspective.
This could become problematic for the Fed, which may live to regret countenancing the bond rally that helped facilitate the precipitous drop in rates from local highs. The squeeze from higher rates was just starting to erode prices when rates started to fall again.
There are no “good” answers. On one hand, the situation illustrated in the familiar (but always poignant) chart below is wholly untenable.
I’ve been over this time and again, but it bears repeating: With consumption slowing and business investment flatlining, the US economy simply can’t afford the ongoing drag from residential investment without succumbing to a recession.
On the other hand, the Fed can’t afford for animal spirits to start stirring again in the housing market. Jerome Powell made it clear during his last two speaking engagements that officials are assuming a sharp decline in shelter inflation later this year. That’s a safe assumption — indeed, it’s a foregone conclusion given developments in leases. But the disinflationary impulse needs to be sustained.
The specter of pent-up demand hitting the market this spring is worrisome, and if the Fed isn’t careful about how they communicate the assumed pause in May, that rush of buyers could get a tailwind from lower rates, with the caveat that I’m not sure how much lower 10-year yields can go in the absence of recession.
Earlier this week, Redfin reported that “Gen Z and millennial renters have lower personal inflation rates than the overall US population for the first time since the end of 2020.”
As Dana Anderson explained, “Young adults signing a new lease are benefitting from cooling inflation sooner than the typical American because rents are increasing slower than the overall cost of housing.”
That’s good news, and the Fed needs to ensure that the respite doesn’t prove fleeting. To hijack and modify the famous (and possibly misattributed) Benjamin Franklin quote, “Disinflation, if you can keep it.”
Commenting further on Wednesday, the MBA’s Kan said that, “Purchase activity that was put on hold last year due to the quick run-up in rates is gradually coming back.” Cue the ominous music.
