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Why interest rates are falling despite Fed raises

Why interest rates are falling despite Fed raises
by Brad Cartier, posted in Newsletter

According to new data from multiple outlets, rents continue to rise although appear to be moderating. Yardi Matrix released its June 2022 National Multifamily Report, showing that average asking rents for multifamily units jumped $19 in June to an overall record-high national average of $1,706. That said, year-over-year growth decelerated by a half percentage to 13.7%, which is 1.3% lower than the February rent growth number of 15.2%.

National average rents - June 2022 Yardi Matrix

Source: Yardi Matrix (July 2022)

“Demand is continuing to cool in Sun Belt and Western metros, which could presage a deceleration in rent growth in coming months. Occupancy rates year-over-year decreased in 11 metros in May, led by Las Vegas (-1.6 percentage points), Phoenix (-1.1) and Sacramento (-1.0), a likely sign that in-migration is weakening. Occupancy rates increased most year-over-year in San Jose (2.0), New York (1.5) and Chicago (1.4).”

Zumper released its National Rent Report at the end of July highlighting that rents continue to rise following a brief slowdown last month. “After last month’s slight slowdown, Zumper’ (sic) July National Index shows a return to substantial price increases. Nationally, median one-bedroom rent is now $1,450, representing a 2% increase over last month and an 11.3% year-over-year jump. July’s two-bedroom median is $1,750, a 2% increase month over-month and 9.3% increase year-over-year.” That said, the forecast is that rents will moderate as consumers continue to tighten their wallets amidst high inflation.

Apartment List had similar findings in their monthly rent report, showing that rent growth is moderating in the first seven months of 2022, sitting at a 6.7% increase compared to 12% over the same period in 2021. Year-over-year, rent growth is now 12.3%, but this has been trending down since early 2022 when this peaked at 18%.

Finally, Zillow released its Consumer Housing Trends Report last week highlighting some of these trends, beginning with the fact that many renters are planning on moving in the coming year. “Among renters considering moving, about half (49%) say they plan to continue renting while 45% say they plan to buy their next home. The remainder (6%) say they plan to have another living situation.”

Renters who are planning on moving - Zillow

Source: Zillow (July 2022)

A bright spot on affordability is a new report from RealPage, which surveyed millions of apartment leases and found that “market-rate apartment renters signing leases so far in 2022 are spending only 23.2% of income toward rent, up modestly from pre-pandemic norms, but still well below the traditional affordability ceiling of 33%.”

Interest rates dropping

As rents continue to rise, interest rates are doing the opposite despite the Fed recently raising its benchmark rate. According to Ben Eisen of the Wall Street Journal (subscription required) mortgage rates dropped to 4.99% for the average 30-year fixed, down from 5.3% the previous week as well as the 13-year high in June of 5.81%.

Interest rates dropping slightly - WSJ

Source: WSJ (August 2022)

Emily Peck of Axios reports on this drop and quotes Mortgage Bankers Association chief economist Mike Frantantoni as opining that we should likely expect this kind of interest rate volatility until inflation tempers. Many investors believe that the Fed record rate increases will eventually ease, causing the current drop in interest rates.

Recent reporting from the Mortgage Bankers Association (MBA) shows that mortgage applications saw a slight uptick, bucking the trend in recent months of declines. Applications jumped 1.2% last week from a week earlier, but we are still at much lower volumes than the same time last year. Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting, had this to say about the data:

“Mortgage rates declined last week following another announcement of tighter monetary policy from the Federal Reserve, with the likelihood of more rate hikes to come. Treasury yields dropped as a result, as investors continue to expect a weaker macroeconomic environment in the coming months. The 30-year fixed rate saw the largest weekly decline since 2020, falling 31 basis points to 5.43 percent…The drop in rates led to increases in both refinance and purchase applications, but compared to a year ago, activity is still depressed. Lower mortgage rates, combined with signs of more inventory coming to the market, could lead to a rebound in purchase activity.”

Redfin reports that this has caused an increase in online buyer activity, with searches, tours, and applications all rising as interest rates decreased. This likely encouraged some homebuyers who are sitting on the sidelines to take another look at the market. Redfin Deputy Chief Economist Taylor Marr notes that “[h]omebuyers may catch a break this month as rates have come down nearly a point from the recent high on fears of a recession…There are deals to be had on some homes that have been sitting on the market with reduced prices.”

Homeowner equity

Homeowners who are eager to tap into their record gains in home equity now see a chance to do so given the drop in interest rates as well as a cooling of competition in resale activity.

Senior Economist George Ratiu at comments on equity, noting that “as many homeowners rushed into summer ready to list their property and capture the equity brought about by record-high prices, inventory has improved. This brought a welcome sign in this year’s real estate markets—price cuts. However,’s most recent weekly data show that some homeowners may feel that they missed the market’s peak and are holding back on listing.”

Christine Stricker of ATTOM Data Solutions reports on equity and home seller gains, reporting that national profit margins (difference between purchase and resale prices) on median-priced homes and condo sales hit a record of 55.5% in Q2 2022.

The report shows that typical profit margins increased quarter-over-quarter in Q2 in 89% of the U.S. metro areas analyzed, and up annually in 95%. The metros with the largest gains were:

Metros with the largest equity sales gains - ATTOM

Source: ATTOM Data Solutions (August 2022)

Molly Boesel of CoreLogic reported last week on home equity, noting that during Q1 2022, the average borrower had $280,000 in home equity, a jump of $64,000 over the past year and $125,000 since 2017. This was primarily due a low home supply that pushed home prices up.

Finally, in reporting on recent Black Knight data, Sarah Wolak of National Mortgage Professional highlights that tappable home equity has hit a record high in Q2, hitting $11.5 trillion, an increase of half a trillion from Q1. The reporting highlights that this could be tempering in the coming quarter as a result of reduced homebuyer activity, home price drops, and increased rates.

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