• Greg Richardson

Markets await Congress’ decision, mortgage rates hit another low

Updated: Jan 27

All three major indices hit record highs this week. Investors heralded the news of a second FDA-approved COVID-19 vaccine along with news of a potential compromise on a second federal stimulus package.


The Dow Jones Industrial Average hit its highest-ever closing level at 30,303.37. The S&P 500 and Nasdaq both hit intraday trading highs as well as closing records, ending the day at 3,722.48 and 12,764.74, respectively. Equity futures were mixed as the waiting game continues on Capitol Hill.


Congress is facing pressure for a stimulus and a deadline for funding to keep the government functioning. The $900 billion relief bill reportedly contains another round of direct payment to Americans along with enhanced unemployment benefits. As it stands, if no bill is passed, the government will shut down on Saturday and pandemic protections would expire the day after Christmas.


The latest numbers from the Labor Department show 885,000 Americans filed initial unemployment claims over the last week. That number is much higher than what economists had anticipated and the highest level for the count since early September. Initial claims for the week prior were revised up by nearly 10,000.


It comes as no surprise then that retail sales were woeful at best in November, dropping by 1.1% according to the Commerce Department. Data for October was also revised down to show a 0.1% decrease instead of the reported 0.3% increase. The report showed consumers pulled back on automobile purchases, clothing purchases and spent much less on eating out.


FED STAYS THE COURSE


The Federal Reserve Open Market Committee wrapped up its monthly meeting this week, deciding to stay the course with overnight lending rates at or near 0%. The Fed also stood by its commitment to purchase mortgage-backed securities and Treasuries by at least $40 billion and $80 billion per month, respectively.


Federal Reserve Chairman Jerome Powell, speaking in a press conference on Wednesday, said "Our guidance is outcome-based and is tied to progress toward reaching our employment and inflation goals. Thus, if progress toward our goals were to slow, the guidance would convey our intention to increase policy accommodation through a lower expected path of the federal funds rate, and a higher expected path of the balance sheet."


This week's FOMC meeting did see the committee revise its predictions for GDP. The FOMC expects 2020 GDP to drop by 2.4%, compared to a 3.7% drop forecast in September. The group also revised up its 2021 real GDP forecast to 4.2% from 4.0%. The Fed also changed its unemployment forecast for the better, predicting a 6.7% rate for the end of 2020 with a 5.0% rate in 2021.


MORTGAGE RATES HIT ANOTHER LOW


Mortgage rates continue to fall as mortgage originators start to tighten margins to keep the refinance machine rolling along. This week's Freddie Mac average on a 30-year fixed-rate mortgage dropped to 2.67%, another historic low. Freddie Mac's Chief Economist Sam Khater was optimistic in this week's release, saying "Homebuyer sentiment is sanguine and purchase demand shows no real signs of waning at all heading into next year."


That demand, however, is causing a problem in affordability. This week Forbes released a compilation of predictions for the 2021 housing market. In it, realtor.com chief economist Danielle Hale said she expects to see home prices "rise another 5.7% on top of 2020's already high levels." Hale continued, "High buyer demand and still-lagging supply will keep prices growing, but at a slower pace than 2020 as buyers content with mortgage rate and price increases that create affordability challenges."


Affordability is also a big issue for homebuyers looking at new construction. A persistent lack of land, materials and a shortage in skilled labor have all put upward pressure on construction costs. The latest National Association of Home Builders and Wells Fargo Housing Market Index, which measure builder confidence, dropped by four points to 86. That is still the fourth time this year the index has gone over the 80-point mark (which had never been hit before 2020).


The low interest rates have continued to help out significantly with refinances. The latest Mortgage Bankers Association survey shows a 105% year-over-year increase in refinances. The MBA's Associate Vice President for Economic and Industry Forecasting, Joel Kan, also noted a specific sector seeing a notable increase that could help the purchase market stay strong in 2021. Kan said, "The ongoing strength in the housing market has carried into December. Applications to buy a home increased for the fourth time in five weeks, as both conventional and government segments of the market saw gains. Government purchase applications rose for the sixth straight week to the highest level since June - perhaps a sign that more first-time buyers are entering the market."


**Due to the holiday, the Market Report will return Friday, Jan. 8, 2021.

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