A shift in investor expectations helped push mortgage rates significantly higher. Ongoing and anticipated fiscal relief is driving expectations for an impending surge in spending, but consumers' outlook for the economy remains muted. And new home sales set the tone for 2021.
- Mortgage rates are now half a percentage point higher than they were at the beginning of February.
- Expectations for rising inflation have prompted Treasury yields to surge.
- Consumer spending increased 2.4% in January from December.
- The University of Michigan's Index of Consumer Sentiment dropped 3.2 points in February from January.
- January new home sales were up 4.3% from December and 19.3% from January 2020, to 923,000 (SAAR).
- The median sales price of new houses sold in January 2021 was $346,400, up 5.3% from January 2020.
So what?
Mortgage rates jumped meaningfully higher this week, accelerating the upward movements that have been brewing for weeks and started in earnest in mid-February. By some measures, rates rose this week at their fastest pace in years, and while they are still very low in historic terms, it appears that the days of record-low rates are a thing of the past. As usual, the jump in rates has been driven by movements in the U.S. Treasury market. The yield on the 10-year Treasury bill – which is most closely aligned with mortgage rates – has risen considerably this year and now sits at its highest level in a year. Several factors have contributed to this spike, chief among them the expectation that inflationary pressures will become stronger in the coming months causing the Federal Reserve to tighten monetary policy. The central bank has taken a series of aggressive steps since the pandemic began in an effort to ease the flow of money through the economy, including lowering benchmark interest rates to zero and purchasing billions of dollars' worth of bonds. The latter step in particular has helped keep mortgage rates suppressed through the last year. Theoretically, if prices start to rise too much, the Fed would need to tighten the supply of money by raising rates and slowing bond purchases. Fed Chair Jerome Powell has insisted the central bank has no intention of tightening policy anytime soon and expects inflation to remain subdued in the coming year, but investors don't appear to be buying it. The recent jump in mortgage rates is likely to slow, but a shift in investor outlook has pulled mortgage rates up – 30-year fixed mortgage rates are now 50 basis points (or half a percentage point) higher than they were at the beginning of February.
While expectations for rising inflation appear to be the chief culprit for the sharply rising rates in the last couple weeks, the other factor driving rates upward is seemingly strong optimism in the state of the economy going forward. Investors appear to believe that a combination of declining virus counts, improved vaccine rollouts and, most notably, more aggressive fiscal policy are likely to drive significant increases in consumer spending in the year to come. Strong January retail sales data, released last week, suggested that more fiscal stimulus – particularly direct payments to households – will usher in a wave of spending, and reports this week backed that up. Overall consumer spending rose 2.4% in January from December, according to the Bureau of Economic Analysis, thanks in large part to a 10% month-over-month increase in household incomes driven by the $600 checks many households received as part of the December stimulus package. The report also highlighted another sharp rise in personal savings rate – up 7.1 percentage points in December from January, to 20.5% – which many suggest will usher in a boom in consumer spending in coming years as the pandemic eases. Still, other reports suggest consumers remain cautious. The 3.2-point monthly decline in the University of Michigan Index of Consumer Sentiment was driven by uncertainty regarding future economic prospects, particularly from lower-income respondents to the survey. A separate read on consumer confidence from the Conference Board rose to a three-month high in February, but the survey's sub-index measuring expectations for the near future fell slightly on the month.
Meanwhile, sales of new homes began 2021 right where they left off in 2020, near their highest levels in more than a decade and widely exceeding already optimistic expectations. As an added bonus, already strong numbers from prior months were revised upward, further adding to the afterglow of what was an extraordinary 2020 — which saw the most new home sales since 2006. The factors that drove this rally – a limited supply of available existing homes for sale and a wave of young adults eager to enter the market – remain in place to begin 2021 and low mortgage rates should help fuel demand as well, even though they've jumped in recent weeks. This persistent demand and heightened competition should also drive more home construction projects in the months to come. Despite challenges, including rising costs of lumber, land and labor, confidence among homebuilders remains near an all-time high, and builders are finding flexible ways to overcome obstacles. This flexibility includes waiting to begin building a home until a sale is secured and/or favorable supplier and contractor agreements can be worked out — in January, the share of homes sold before beginning construction was 30.8%, up notably from both December and January 2020. This is exactly the kind of tone builders wanted to set at the start of 2021, establishing a very strong early pace for new home activity to come.
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