California Association of REALTORS Market Minute for January 18, 2022
The recent surge in COVID cases and high inflation have been dominating the news in the past few weeks. Consumers remain concerned and their decline in optimism has had an impact on the economy. The softening in retail sales at the end of last year and the repositioning of investors in the bond market that prompted rates – at least partially – to increase are reflections of the current setback in consumer sentiment. Despite these latest concerns, an increase in mortgage applications in the first week of 2022 suggests that housing demand is still strong and the market should remain solid as we kick off the new year.
Interest Rates Continue to Rise: The average 30-year fixed-rate mortgage reported weekly by Freddie Mac jumped to the highest level since March 2020 in the second week of 2022, and the daily average tracked by Mortgage News Daily suggests that further increase will follow in the coming week. Rates have been rising sharply since the end of last year and were just about to come back down until the latest inflation news pushed them back up. The prospect of a faster than the anticipated tightening of monetary policy triggered by inflation that remains stubbornly high could keep rates elevated in the short term. Despite the current rising trend, mortgage rates are still low by historical standards, and the average 30-Year FRM will likely remain near or below 4% by the end of the year.
Mortgage Applications Inch Up: Mortgage applications recorded in the week ending January 7, 2022, increased 1.4% from the prior week, according to the latest survey released by the Mortgage Bankers Association (MBA). Purchased applications increased 2% from a week earlier, and the unadjusted purchased application number was 17% lower than a year ago. Despite recent increases in rates, both conventional and government purchase applications showed increases, with FHA purchase applications increasing almost 9%. While it is too soon to tell the effect of the current surge in rates, housing demand is expected to be solid as demographic drivers and the ongoing economic recovery will continue to provide support to the market.
Foreclosure Activity Reaches the Lowest Level since 2005: Foreclosure filings made on 151,153 U.S. properties during 2021 were 29% fewer than in 2020 and were down 95% from the peak of nearly 2.9 million in 2010, according to ATTOM. Foreclosure activity last year was at the lowest level since the company began tracking it 17 years ago. The filings only impacted 0.11% of all housing units, compared to 0.16% in 2020 and 2.23% in 2010 during the Great Recession. With prices increasing by double-digits for many homes across the U.S. last year, over 87% of homeowners in foreclosure have positive equity, which means most borrowers could sell their house at a profit and will not need to go through the foreclosure auction process.
Retail Sales Sink amid Record Inflation and Surge in COVID Cases: Retail sales dropped 1.9% in December as COVID cases started rising and inflation surged to a recent high at the yearend. The decline at the end of the year was partly due to early shopping and demand being pulled forward as consumers were concerned about supply constraints. In fact, December’s decline followed record-level retail sales that began with a 1.8% gain in October from the prior month. Despite the monthly moderation, retail sales continued to improve from the past year by 16.9%. It was the tenth consecutive month with double-digit growth since March 2021. The December drop resembles a similar decline in 2018 when retail sales fell 2.0% in that month. If retail sales follow the same trend this time around, we should see a strong bounce back in the first quarter of 2022 once the omicron wave subsides.
Consumer Sentiment Dips to Second-Lowest Reading in a Decade: The Consumer Sentiment Index reported by the University of Michigan dropped 2.5% in early January 2022 from its level in December 2021 and was down 12.9% from a year ago. The preliminary value of 68.8 was the second-lowest in a decade and was below the 6-month average of 70.3. Accelerating inflation was a key contributor to the dip in the index, as 75% of survey respondents ranked it as a more serious problem than unemployment. The decline in sentiment was most acute among households earning less than $100,00 a year, presumably because they are the ones most hurt by high inflation.