Mortgage rates surged to a 23-year high this week. The rate on the average 30-year fixed mortgage increased to 7.31% from 7.19% the week prior, according to Freddie Mac. That’s the highest rate since mid-December 2000, when it averaged 7.42%.
This is the way interest rate increases from the Federal Reserve work: Higher rates hit the housing market first as mortgages get more expensive and buyers figure they’ve been priced out of the market–for this cycle.
And that’s exactly what we’re seeing in the housing market right now. On Thursday D.R. Horton (DHI), the largest U.S. homebuilder, reported that in its most recent quarter cancellations of orders for new homes climbed to their highest level in three years. The company said its cancellation rate in its most recent quarter was 24%, up from 17% during the same quarter last year.
Lennar (LEN) has started trimming prices and offering buyer incentives to bolster sales. The bad news here is that a slowing housing market is an early indicator of rising odds of a recession. The good news is that this is supposed to be what happens–the housing sector slows–when the Federal Reserve raises interest rates to fight inflation.
Sales of new homes climbed in January from December’s disappointment–climbing 3.7% to a 555,000 annualized rate–but still fell short, modestly, of forecasts. Economists surveyed by Bloomberg were looking for an annualized rate of 571,000. I don’t think there’s anything in these numbers to cause a revision in thinking about interest rates at the Federal Reserve.
Contracts to purchase previously owned U.S. homes fell in November, unexpectedly, according to the National Association of Realtors in Washington. Pending home sales declined by 2.5% after a 0.1% increase in October. This may seem out of step with news that purchases of new U.S. homes rose in November to the second-fastest pace in almost nine years, but it’s not
The worry isn’t really that increase to 0.50% in the very near term, but the possibility that the Fed, despite its current language, will embark on a long cycle of rate increases similar to that it began in 2004
The Federal Reserve has to reassure markets that it won’t taper its $85 billion in monthly purchases too quickly and at the same time keep the market focused on the inevitability of that tapering later if not sooner
