Certainly, the economy will do better once the pandemic is damped down. A wide swath of the leisure, hospitality and entertainment sectors of the economy simply can’t fully function while the virus rages. The only question is “how soon?” and for that, there simply isn’t one clear answer available. Meanwhile, the economy that is functioning did so at a pretty solid level in the fourth quarter of 2020, and that despite increasing sickness and tightening of restrictions in a number of hard-hit locales.

After a record annualized decline of 31.38% in the second quarter and an equally impressive 33.33% increase in the third, the economy settled to something closer to normal, sporting a 4.01% annualized increase in the advance reading of Gross Domestic Product for the period. For the year, GDP output shrank by 3.5%, the biggest decline since the Great Recession days of 2009. Comparing the fourth quarter of 2020 against the same period one year ago (pre-pandemic) overall output was about 2.5% lower. Given all that has happened in a year’s time, that’s really not as bad is it could have been. Price pressures settled during the fourth quarter, too, with Personal Consumption Expenditure inflation easing from a 3.7% annual rate to 1.5%, and core PCE for the period downshifting to 1.4% from 3.4% annualized.

The Federal Reserve held its first meeting of 2021 last week, and there was no change to monetary policy. Rather, the Fed simply reiterated its position of holding rates near zero, purchasing Treasuries at $80 billion per month and accumulating new mortgage-backed securities at $40 billion per month. At the close of its meeting, the Fed again noted that “The COVID-19 pandemic is causing tremendous human and economic hardship across the United States and around the world. The pace of the recovery in economic activity and employment has moderated in recent months, with weakness concentrated in the sectors most adversely affected by the pandemic.(emphasis ours)

Sales of new homes have cooled from their heady pace of a few months ago, but some seasonal slowing as the holidays kick in isn’t uncommon at all. The Census Bureau reported that 842,000 (annualized) homes were sold in December, up 1.6% from a (downwardly) revised 842,000 in November. No worries, though, since sales are still some 16.5% above December 2019 levels, so it’s not as though the market has slowed appreciably — more like settling back to a more sustainable pace. The supply of new homes available to buy at the present rate of sale rose 0.1 to 4.3 months (302,000 units built and ready for sale) and prices of new homes sold were 2% higher compared to November (about 8% higher than last year during the same month). With spring soon on its way, sales of new homes will likely flare higher again as is the normal seasonal case.

Existing home sales may level off for a bit, though. The National Association of Realtors Pending Home Sales Index was down by 0.3% in December, a fourth consecutive decline. As this is indicative of signed contracts, it’s not surprising to see a softening as during the holidays, as fewer homes are available to buy (inventory levels are presently record thin) and fewer homebuyers are out and about looking at the homes that are available. The PHSI is more than 21% higher this year than a comparable month a year ago, and looking forward, spring’s coming, and it may be that we’ll have a more normal spring housing season this year.

Overall, the economy seems to be back to a much steadier state, and perhaps even poised to start to fill in the remaining growth gap caused by the pandemic before too much more time passes. It does seem like we’ve endured a bit of a soft patch for January; the facts and figures that show this will be revealed in the coming weeks, and the bit of a lull may continue into February, too. That said, the present position overall for the economy isn’t a terrible one, and, with rising vaccination and falling incidence of disease we may be able to get more fully back on track before long.

In the last couple of weeks, mortgage rates have mostly wandered about, favoring a slightly downward bent. That seems to have mostly run its course over the last few days, and so we think that the average offered rate for a conforming 30-year FRM as reported by Freddie Mac will likely be unchanged when the next report comes on Thursday morning. However, it’s a big week for data to start the month, so there’s perhaps a little uncertainty in this near-term outlook.

Mortgage Market information provided by Jon Aucutt, Main Street Bank
31780 Telegraph Road, Suite 100
Bingham Farms, Michigan 48025
jaucutt@msbmi.com

It would appear that the successor to Steven Mnuchin at Treasury will be Janet Yellen, the former head of the Federal Reserve. She would be the first woman to hold the position, just as she was the first woman to helm the central bank. At her Senate confirmation hearing, she urged that the legislative body “act big” when it comes to a new stimulus program, and will be in the position of championing President Biden’s proposed $1.9 trillion plan announced in the previous week. The Treasury will of course be issuing more new debt to finance new spending, and this will come at a time of record levels of government debt already. Ms. Yellen’s experience at the Fed and connections there will be useful in trying to eventually steer the government back toward something resembling a more balanced approach to tax and spending policy.

For the moment, it’s not clear what if any changes may come at the Federal Housing Finance Agency, presently headed by Dr. Mark Calabria. whose current term as director doesn’t expire until 2024. A Supreme Court case heard last month may decide whether or not the President has the authority to fire the FHFA director on an at-will basis. The agency presently has a structure akin to the one that was the CFPB, but that agency’s construction was ruled unconstitutional last year. Dr. Calabria has been looking to release Fannie Mae and Freddie Mac from government conservatorship and back to private ownership as part of reforming the housing market, but the two remain wards of the federal government more than 12 years after crumbling during the housing market crisis.

The last regulatory group that’s important to the mortgage market should also see no immediate change, as Federal Reserve Chair Jay Powell’s current term runs until next year, and at the moment, there’s little reason to think that he wouldn’t be reappointed. At the very least, it means that accommodative monetary policy, low rates and open-ended bond-buying programs are likely to continue. Under Powell, the Fed is using nearly an “all-in” strategy for monetary policy, employing both conventional and novel tools to support the economy. As well, the Chair has also at times implored the Congress to provide greater fiscal support. With a new monetary policy framework in place, the Fed would appear to be supportive of greater levels of government spending to spur growth; in turn, this could stoke firmer inflation, something that has eluded the Fed for many years now.

The housing market is certainly warm, but is it overheating? Probably not. Low rates and limited inventory amid strong demand have caused prices to rise very quickly, something on the order of 3-4 times the rate of income growth at a minimum. Falling mortgage rates have fostered this, since a lower rate allows for a given income to be able to carry a larger loan amount. However, it would appear that the bulk (perhaps all) of the declines in rates have occurred, and with the prospects for greater stimulus, increasing levels of vaccination and what should be declining levels of infection now that the holiday surge is passing that there are likely more reasons for mortgage rates to be steady to perhaps slightly higher as we go. Absent the falling-rate offset, higher home prices may start to bite into affordability a bit more, and that would provide tempering for price gains.

Existing home sales in December edged 0.7% higher, rising to an annualized rate of 6.76 million for the month. For 2020 as a whole, 5.64 million sales took place, a figure a little above our expectations for the year, but when we wrote our 2020 forecast in late 2019, we didn’t foresee the pandemic or its effects on interest rates and housing markets. Regardless, sales of existing homes for the month were at their highest annualized rate since 2006, with the median price of a home sold 12.9% above year-ago levels, with nominal prices just a little below all-time highs.

With prices high and nothing to buy — and now mortgage declines leveling off — the housing market is likely to be an increasingly challenging one for potential buyers until more supply comes on line. Although typically thin during the holidays, the current amount of supply is pegged at just 1.9 months at the present rate of sale, down from 2.3 months in November, and will remain extraordinarily tight even is this level doubles before spring (which seems unlikely).

If we get to a point where inflation is running warm for a while period and if we get to a place where unemployment is closing in on pre-pandemic levels for a good while, we’ll then see investors injecting concerns into mortgage pricing, and that only if the Fed isn’t still snapping up billions of dollars of mortgages every month. At present, wandering around just above all-time record lows is about all mortgage rates can do.

Mortgage Market information provided by Jon Aucutt, Main Street Bank
31780 Telegraph Road, Suite 100
Bingham Farms, Michigan 48025
jaucutt@msbmi.com

Not quite on cue, President-elect Biden announced a new $1.9 trillion plan of stimulus spending, including new direct payments toward individuals, expanded and lengthened unemployment benefits, increased tax credits for child expenses, aid for states and funds to cover the costs of vaccinating hundreds of millions of Americans. These outlays would be covered by new Federal borrowing, of course, and that means a spate of new issuance of Treasury bonds, which would come on top of already record-high levels. There is also the potential for more considerable Federal debt issuance to come, too, as the new administration will no doubt have a range of spending priorities it will want to fund at a time when raising taxes to pay for them isn’t likely to happen until the economy is more fully on its feet again.

With debt supplies already high, there may be more supply than demand when any new debt comes to market, and the swell of new debt would of course have some effect on interest rates. However, for at least a time, the effect of excess supply on interest rates is greatly muted as there is a willing buyer in the market with unlimited resources to absorb it as needed: The Fed. Absent the Fed’s commitment to buy up $80 billion per month of Treasuries and another $40 billion of MBS, fixed-income markets might have already become clogged with supply, and interest rates would likely be higher than not. As more debt comes with new fiscal outlays, this tempering mechanism should help keep rates from rising more measurably. Presently, and with this in mind, Treasury yields have already settled back from last week’s peak by a bit, and mortgage rates should settle a bit, too.

Even though there are plenty of reasons that should keep rates from rising much in the near term, it’s also starting to feel as though they increasingly have fewer reasons to decline much, let alone routinely set new record lows as they did so many times in 2020. It’s early times, to be sure, but the holiday COVID-19 surge will likely start to diminish, greater levels of inoculation will begin to happen and (hopefully) expand as we go, and the warmer weather of spring (less being cooped up indoors with others) is within shouting distance for at least some of the U.S. All should permit somewhat greater levels of economic activity, and a fresh blast of cash into the economy from new stimulus would see growth accelerate to an even greater degree. All that argues for somewhat firmer than softer rates, but there is still a difficult patch to navigate, so rates aren’t going anywhere very fast at the moment.

Two expressions of the current (or at least near past) climate suggest that things remain a challenge. The Fed’s own survey of regional economic conditions (aka “Beige Book”) revealed a softer tenor of economic activity in the six weeks leading up to January 4. Of the 12 Federal Reserve districts, two reported essentially unchanged levels of activity and two reported declining levels. Seven reported only “modest” gains in their economies and just one said the improvement was “moderate”. The previous report was on balance rather stronger, so economic activity tailed as 2020 came to a close.

Although mortgage rates did kick a little higher last week, there’s no reason to expect any sustained increases, and the small bump should have no significant effects on either home buying or refinancing. Simply, the picture hasn’t changed much; rates are just less fantastic than they have been, and last week’s bump seems as though it’s already giving way to a fallback for this week. With that as a thought, we think that the average offered rate for a conforming 30-year FRM as reported by Freddie Mac will settle back by perhaps five basis points or so by the time next Thursday morning rolls around. No, we won’t be back at record lows, but not all that far from them.

Mortgage Market information provided by Jon Aucutt, Main Street Bank
31780 Telegraph Road, Suite 100
Bingham Farms, Michigan 48025
jaucutt@msbmi.com

We can’t know the future, though. Some unexpected something(s) will of course occur in 2021, whether they happen on an individual or intimate basis, or to select groups of folks or even all of us collectively. Housing markets — homeowners and homebuyers alike — are one such collective, and neither could have expected the profound changes and opportunities that arose last year. Even though rates were already pretty low by historical standards when the year 2020 began, they have firmed up a little from their annual low as the year came to a close. With a record-long economic expansion entering its 11th year, a cessation of trade wars that tempered growth and growth picking up speed, odds then favored somewhat firmer rates, but the virus had other ideas.

With one country after another closing, and uncertainty and risks skyrocketing, investors got spooked and came to a point of selling everything to move to cash; interest rates spiked, financial markets became unhinged and central banks across the world moved into emergency positions, slashing rates, buying bonds and opening up new lending and market-support facilities, moving to liquefy every market and be the buyer of last resort for a range of assets if need be. The market panic was quelled, and a depression likely averted. Lockdowns ensured that the economies of many countries would fall into record-setting recession for a time, only to quickly (if partially) emerge.

As they did, unprecedented opportunities arose for homeowners. For those in difficult straits, and with the experience of at least some lessons learned in the last housing bust, a nearly instant forbearance program for homeowners was released, and without even the burden of proof of hardship. Millions signed up; a core of the most troubled homeowners (numbering about 2.8 million) yet remain in forbearance. For others who experienced no payment troubles, opportunities to refinance at record low rates — multiple times — appeared. Freddie Mac’s formal all-time low for a conforming 30-year (3.31%) FRM was touched in mid-April, broken by the end of the month a new record low was set in 17 weeks since then, falling to as low 2.66% near the end of the year.

Potential homebuyers took notice, too. The year began with an early start on the spring homebuying season with a solid winter showing for sales, but that came to a relative standstill in March through May, only to revive with vigor and then some as the economy re-opened through the summer. The delayed action of the spring market was joined by additional demand from second-home buyers looking to escape to remote locations, away from virus and strife, and by buyers who could now work remotely and so no longer felt constricted by proximity to center-city workspaces. With competition for houses fierce and existing home prices rising sharply, it’s also likely that some demand has been “advanced” from the coming year in order to grab a home before costs increased further.

With the existing home market tight and expensive, and possibly with commuting to work far less of a concern, sales of new homes also enjoyed a strong period during the mid-part of 2020, but sales are settling back to a very solid (if less frenetic) trend as the year turns. Before a pandemic dip last spring, sales of new homes had been in a 10-year uptrend, and seem poised to return to that kind of steady, solid (if unspectacular) improvement now that the pandemic distortion in sales has cycled through.

Existing home sales have started to cool a bit from heady annualized levels too, although that’s to be expected as the winter months kick in. The spring-bumped-into-summer housing season has passed, and while there is still plenty of demand there is little supply to be had, and even fewer homes are put up for sale once the onset of the extended holiday (and then winter) season begins. The National Association of Realtors Pending Home Sales Index contracted again in November, declining by 2.6%, a third consecutive decline. Compared to a year ago, though, contract signings are still some 16.4% higher, and if we weigh this change against sales levels last December/January, it looks like this will translate into a 6.25 million (or so) annualized rate of sale. October’s 6.86 million (annual) was the recent peak, and sales are likely to continue to cool somewhat until the next spring cycle kicks up again.

As we look ahead to the coming year there is reason for optimism, what with ever-expanding inoculation (hopefully) allowing for greater freedoms for schooling, travel, entertainment and socialization. Should things work out as hoped, portions of the economy here and elsewhere across the globe that have been severely curtailed could start to re-engage again in a more meaningful way, re-igniting employment gains. Economic stimulus for businesses should help keep at least some of them alive and viable until this happens, while new cash distributed as checks this winter will be available for spending as soon as opportunities arise. Faster growth seems likely in 2021, and will come at a time when the Federal Reserve remains committed to a low-and-liquid stance for monetary policy (although they may need to re-think this sooner than they presently expect).

Overall, for our part, we’re hopeful about the prospects for the year ahead, even it if may be a while yet before seeing someone maskless doesn’t elicit a response. May great things lie ahead for you and yours in the coming year, and happy new year to you all.

Mortgage Market information provided by Jon Aucutt, Main Street Bank
31780 Telegraph Road, Suite 100
Bingham Farms, Michigan 48025
jaucutt@msbmi.com