Higher Rate Levels Take a Bite Out of Housing Activity


    • While the Fed has only hiked once to date, they will follow that with a 50bps hike next week, meanwhile, the market has been busy doing plenty of the heavy lifting for the Fed.


    • One sector that has been a real economic star since the pandemic began has been housing. It motored on in the face of higher housing prices over the last few years and those higher prices have also been a major contributor to higher inflation via the Owners Equivalent Rent component in CPI.


    • As we mentioned above, the market hasn’t waited for the Fed to get active in rate hikes. Mortgage rates have already risen from a low of 2.96% in August to 5.42% as of yesterday. That nearly 2.5% increase has been slowing refinance activity for months but now its unequivocally having an impact on purchase application activity as well.


    • Note in the graph below, as the 30yr mortgage rate has risen, the falloff in refinance activity and now purchase applications. Except for a spike low during the initial pandemic lockdowns in March 2020, purchase applications have fallen to a level last seen in December 2018.


    • The Fed has always said that raising rates will slow demand and that certainly seems to be the case in the latest housing market numbers. That’s getting a lot mileage out of a single 25bps rate hike.


    • Expect continued slowing in your MBS prepayments and also start to look for a drop off in housing sales, both new and existing. So, it does look like one previously strong pillar of economic growth during the pandemic is about to downshift over the coming months.
Source: Bloomberg


Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 2.55 2.74 2.87 3.05 3.29 3.76
0.50 2.53 2.72 2.81 2.94 3.15 3.65
1.00 2.53 2.69 2.78 2.90 3.06 3.52
2.00 2.68 2.72 2.82 2.94 NA
3.00 2.77 2.88 NA
4.00 2.83 NA
5.00 2.80 NA
10.00 NA

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Published: 04/27/22 Author: Thomas R. Fitzgerald