The housing market is gearing up for its busiest season yet, with prices soaring and mortgage rates on the rise. According to Dow Jones Market Data, the 10-year Treasury yield, which is a key indicator for mortgage rates, reached 4.163% on Monday. This increase, along with Friday’s surge, marks the largest two-day gain since June 2022. The rise in yield comes as a result of stronger-than-expected job numbers and ISM price data, indicating that the Federal Reserve’s anticipated rate cuts may be delayed.
As a result of this surge, one measure of mortgage rates surpassed 7% for the first time since mid-December. According to a survey by Mortgage News Daily, the 30-year fixed mortgage rate stood at 7.04% at midday on Monday.
Prospective buyers are no strangers to the volatility of mortgage rates. In early 2021, the 30-year fixed rate dropped to a historic low of 2.65%, as reported by Freddie Mac. However, over the years that followed, mortgage rates climbed to their highest point in two decades, reaching 7.79% in late October 2023. Last week, Freddie Mac recorded a weekly average rate of 6.63%. Nevertheless, the recent surge in Treasury yields suggests that rates will continue to rise this week.
The combination of increasing rates and persistently high prices could create challenges for potential buyers as the traditionally busy spring season approaches. Redfin reported that the median home sold for $361,245 in the four weeks ending on January 28th, marking a 5.5% increase compared to the previous year.
With mortgage rates on the rise and home prices reaching new highs, the housing market is preparing for an eventful spring season. Potential buyers should be prepared for increased volatility and possible affordability challenges in the coming months.
Housing Costs and the Federal Reserve
Four Democratic U.S. senators—Elizabeth Warren, John Hickenlooper, Jacky Rosen, and Sheldon Whitehouse—recently penned an open letter addressing the issue of housing costs to Federal Reserve Chair Jerome Powell. In the letter, they expressed concern that high interest rates are exacerbating the country’s housing access and affordability crisis. The senators urged Powell to consider the impact of the Fed’s interest rate decisions on the housing market and to reverse rate hikes that have made affordable housing increasingly unattainable.
However, Powell made it clear that addressing housing costs is not within the purview of the Federal Reserve. During a press conference following a Federal Open Market Committee meeting, Powell emphasized that the Fed’s statutory goals are centered around maximum employment and price stability. He stated, “We’re not targeting housing price inflation, the cost of housing, or any of those things.” The Fed’s primary focus is on maintaining a stable economy.
Contrary to previous expectations by futures traders, Powell indicated that it is unlikely for the FOMC to cut rates in March. Currently, futures markets are predicting five 0.25% rate cuts for 2024, down from six anticipated cuts just last month according to the CME FedWatch tool.
Powell acknowledged that the Federal Reserve is aware of how rate hikes and cuts impact the housing market. However, he also noted that there are underlying issues regarding the availability of housing that cannot be addressed through monetary policy. Powell stated, “There hasn’t been enough housing built, and these are not things that we have any tools to address.”
As the country continues to grapple with the ongoing housing crisis, it is essential for policymakers to explore comprehensive solutions beyond monetary policy adjustments. While the senators’ concerns regarding housing costs are valid, it is important to recognize that the Federal Reserve’s primary objectives lie within its mandate of employment and price stability. Addressing the availability and affordability of housing requires collaborative efforts from various stakeholders across the government and private sector.
Builder Stocks Face Decline Amidst Shifting Rate Expectations
The builder stocks market experienced a notable decline on Monday, as reflected by the iShares U.S. Home Construction exchange-traded fund, which dropped by 1.1% during the afternoon session. These stocks, which had been on an upward trajectory in the final months of 2023, encountered a speed bump: the ETF has now experienced a year-to-date decline of 0.8%, while the S&P 500 saw a gain of 3.8%.
The decline in builder stocks was expected as early as late last year. Analysts suggested that the shift in expectations for Federal Reserve rate cuts could potentially cause mortgage rates to rise, ultimately leading to a downward trend for builder stocks.