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The revised QM rule and potential effect on the non-agency market
The revised Qualified Mortgage (QM) rule will likely not go into effect until October 1, 2022–more than a full year past the initial deadline of July 1, 2021 set by the Consumer Financial Protection Bureau (CFPB). The rule states that government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, would move to a price-based model instead of using debt-to-income (DTI) ratio to determine a borrower’s ability to repay. Citing the pandemic as an obstacle, the CFPB’s Acting Director Dave Uejio says they want to ensure that “responsible, affordable mortgages remain available.” This new price-based approach dictates that the annual percentage rate (APR) on the loan does not exceed the average prime offer rate (APOR) for a comparable transaction. For loans to qualify as safe harbor, the APR cannot exceed the APOR for a comparable transaction by 1.5 percentage points or more for a first lien transaction. Safe harbor qualification is a protection for lenders against borrowers who try to sue claiming the lender provided them with a mortgage which the lender did not believe they could repay. Ability to repay was a serious issue that was a main factor in the 2008 housing crisis. This ruling by the CFPB means that lenders have more time to take advantage of the QM patch. That patch allows QM status for loans that are sold to Fannie Mae or Freddie Mac. Some originators had already started moving to the new pricing model, but now they have more time to make the adjustment and will likely be working under both standards for some time in order to be prepared. Speaking on a panel during the 2021 IMN Jumbo Virtual Symposium, MAXEX President and COO Bill Decker gave his thoughts on how this new rule will affect the non-agency mortgage space. Decker said, “Moving to APOR is going to free up a lot of compliance oversight in terms of the manufacturing.” Decker continued, saying “I believe it’s something like 40% of the jumbo mortgages that went into non-QM deals will become QM eligible under the APOR rules. So that’s going to significantly alter and transition some of the burden, which has been significant, in the non-agency market.” Also, while this rule is generally accepted on paper as being a better, more accurate measurement of ability to repay than DTI, it is still untested. MAXEX Managing Director of Capital Markets and Head of Buyer Relations Charlie Wickliffe says, “The new QM rule is going to have to go through a period of performance analysis. I think trying to understand the credit implications of a growing footprint for the prime QM jumbo space is something that the market is going to be working very hard to understand. And certainly, our investors are spending a lot of time focusing on that right now and for the coming months.” Decker also noted the potential that this revised rule has to create a more competitive marketplace for high-quality loans. “With the new APOR rule, it creates an interesting competitive landscape because the private market can now get a safe harbor, QM eligible asset through APOR and get that into a securitization,” says Decker. “So that creates a very interesting opportunity for the private market to compete against the GSEs and the MIs for those high LTV assets.” ABOUT THE QM RULE The most important factor in determining if someone qualifies for a home mortgage is their ability to repay the hundreds of thousands of dollars they’re asking to borrow. The 2008 financial and housing crisis exposed years of subprime lending standards with originators issuing mortgages to people who they knew were far less likely to be able to repay. That resulted in foreclosures, margin calls for investors and the housing bubble collapse. As part of the Dodd-Frank Act, the CFPB was formed to help protect consumers from predatory lending practices. One tool implemented to ensure best lending practices was the QM rule. This required that borrowers have a DTI ratio of no more than 43%. This means that their amount of income exceeds their amount of debt by a certain percentage, making it less likely they’ll default on the loan. The QM patch was created to ensure the GSEs, Fannie Mae and Freddie Mac, could have an exception to the rule and lend to borrowers who had less than perfect DTI. This patch was always meant to be a temporary measure and was set to expire in January 2021. That expiration date was pushed back to July 1, 2021 and there is currently a push to extend that date out to October 2022.
A Bigger, Better, Faster Jumbo Express
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Economic conflict steepening as Wall Street and unemployment soar
February’s breakneck pace on Wall Street slowed down just slightly this week with all three major averages hitting record levels. The Dow rose by 0.9% this week, hitting a record on Thursday. The Nasdaq and S&P 500 have gained 0.8% and 1.2% this week, respectively, both hitting record closes on Thursday. Wall Street is starting to price in more positive economic data along with reaction to President Biden’s statement that he has secured another 200 million doses of the COVID-19 vaccine. However, the Labor Department’s unemployment report this week was worse than expected. There are 793,000 initial unemployment claims according to the recent report, against the forecast of 760,000. While higher than expected, the number was an improvement from the upwardly revised 812,000 for the previous week. Continuing claims were also higher than expected, coming in at 4.545 million. The unemployment data was part of what caused bond yields to move lower. Demand was much softer for the 30-year Treasury. The 10-year Treasury note yield dipped a hair but has been holding fairly steady and sitting at 1.152% early Friday morning. Consumer prices rose by just 0.3% in January, boosted mainly by an 7.2% increase in gasoline prices. The core CPI, which excludes the volatile products like energy and food, remained unchanged from December, pulled down mainly by a large 3.2% drop in airline prices. Many analysts are expecting for inflation to start pushing prices up this spring. However, the initial thought is that the effect will be transitory. POWELL REINFORCES MONETARY POLICY SUPPORT Federal Reserve Chairman Jerome Powell continues to double-down on his stance of continued monetary policy support to help the United States economy recover from the COVID-10 pandemic. In prepared remarks, Powell said the matter would require “patiently accommodative monetary policy that embraces the lessons of the past.” Last week’s jobs report from the Labor Department showed the unemployment rate dropping to 6.3%. Powell contends that number does not paint a full picture of what’s happened to the U.S. labor force and says we are still a “long way” from where we need to be with the employment situation. Powell believes the 6.3% figure to be dramatically off, instead saying the unemployment rate is much closer to 10%. Currently, about 10 million Americans are without a job. That is about 4.4 million more people than this time last year. Typically, a drop in the unemployment rate would lead to the Fed increasing overnight lending rates to deal with inflation. However, the Fed is keeping rates around 0% and continuing to purchase about $120 billion worth of bonds every month. Powell added that beyond fiscal support, recovery will require a broader social effort. “Given the number of people who have lost their jobs and the likelihood that some will struggle to find work in the post-pandemic economy, achieving and sustaining maximum employment will require more than supportive monetary policy,” said Powell. “It will require a society-wide commitment, with contributions from across government and the private sector.” PURCHASES STAY HOT, AND PRICEY Purchase applications for mortgages are up 17% from one year ago, despite being down weekly. The data from the Mortgage Bankers Association also shows that the average purchase price. Refinances also fell on a weekly basis but remained 46% higher annually. Mortgage rates remained flat for a second week, according to Freddie Mac. The average interest rate on a 30-year fixed-rate mortgage is still a historically low 2.73%. Sam Khater, Freddie Mac’s Chief Economist, says this is a great example of how we are looking at a very dichotomous economic situation. “The services economy remains in the doldrums, but the production side of the economy remains strong. New COVID-19 cases are receding, which is encouraging and that has led to a rise in Treasury rates. But, the run-up in Treasury rates has not impacted mortgage rates yet, which have held firm. The residential real estate market remains solid given healthy purchase demand while implied real-time home price growth is high, due to the inventory shortage that is plaguing the housing market.” A note for our readers: We’ve enjoyed bringing you the MAXEX Market Update over the past several months. But we’re ready to make our most popular report even more exciting for our followers. Coming up soon, we will slightly change the format of the blog to bring you more exclusive, specific jumbo loan data. We want to make sure our readers have the most accurate information to guide their decision making throughout the month. To do that, we will start delivering the blog once a month to give our analysts time to compile the best selection of jumbo market data to distribute to you. Thank you so much for your loyal readership and be on the lookout for our updated MAXEX Market Report!
Unemployment rate drops, market rebounds from volatility
The volatility of last week gave way to a fresh winning streak on Wall Street. Corporate earnings paired with positive economic data helped push stocks forward with the Dow closing up another 250 points on Thursday. That was the index’s fourth-straight day of gains. Weekly gains going into Friday, the Dow had increased 3% with the S&P 500 and Nasdaq both hitting record-high closings on Thursday. There was more positive news about stability on Wednesday as the CBOE Volatility Index (VIX) posted its largest three-day decline ever, falling from 30+ down to 22.9. The 10-year Treasury note yield hit a high Friday morning, reaching 1.15%. That is the highest the 10-year note yield has been since March 2020. Most of the positive movement was spurred by the stronger than expected unemployment data. The Labor Department’s Jobs report, released Friday, painted a picture of a still struggling economy that is slowly working itself out of a hole, but still moving in a positive direction. Nonfarm payrolls increased by 49,000 in January and the unemployment rate dropped to 6.3%, according to the latest jobs report. The report also notes that 14.8 million Americans reported that “they had been unable to work because their employer closed or lost business due to the pandemic—that is they did not work at all or worked fewer hours at some point in the last four weeks due to the pandemic.” That number is 1.1 million lower than December’s count. Private payrolls performed better than expected in January. ADP’s monthly jobs report showed a gain of 174,000 jobs, well above the expected 70,000. The most volatile sector during the COVID-19 pandemic, the service-providing sector, led the way with 156,000 jobs. Education and health-services industries were responsible for 56,000 with leisure and hospitality adding 35,000. Weekly jobless claims were also better than expected. The Bureau of Labor Statistics showed initial claims came in at 779,000 for the week ending Jan. 30. That’s the lowest number of initial claims since the end of November. Continuing claims fell sharply but are still at 17.8 million total. SENATE PASSES BUDGET RESOLUTION Vice President Kamala Harris cast her first tie-breaking vote as the Senate passed a budget resolution early Friday morning. The resolution will help set the stage for Democrats to pass another stimulus package without support from the GOP. A similar budget measure passed by the House earlier this week will have to be voted on again considering the Senate passed an amended version. Once the House passes the Senate version of the budget, legislators can start writing up the next financial aid package. It’s expected to include provisions for stimulus checks, unemployment benefits and vaccine funds along with other measures. The current timeline for passing and enacting another COVID-19 stimulus package is late February or early March. CBO PREDICTS RAPID ECONOMIC RECOVERY The Congressional Budget Office predicts the U.S. economy will grow at the fastest pace since 2009. The CBO’s recent release out this week forecasts a “rapid” economic recovery even if the federal government doesn’t provide any more financial stimulus. The report states, “CBO currently projects a stronger economy than it did in July 2020, in large part because the downturn was not as severe as expected and because the first stage of the recovery took place sooner and was stronger than expected.” The new projection for economic growth is 4.6% in 2021. In 2020 we saw a 3.5% contraction, the biggest annual decline since 1946. Unemployment, however, is not expected to recover as fast as the economy. The CBO expects unemployment to hover around 5.7% throughout this year and expects we won’t hit pre-pandemic employment levels until 2024. REFINANCES PICK UP STEAM The refinance boom isn’t over quite yet. A slight drop in mortgage rates last week was enough to spur refinance holdouts to lock in a better interest rate for their home. The Mortgage Bankers Association weekly data shows demand up 59% annually for refinances with the group’s refinance index hitting its highest level since March 2020. The latest data from Freddie Mac shows the 30-year fixed-rate mortgage average at 2.73%. Typically, people looking to buy a home would jump at that kind of rate. But the lack of supply, compounded by people refinancing their homes instead of selling, has led to increasingly overheated home prices that are starting to outweigh the benefits of a low interest rate. The MBA’s data shows purchase demand is 16% higher than this time in 2020 but week-over-week it remained relatively flat. One specific region seeing a marked increase in purchasers is New York City. Manhattan saw a 100% year-over-year increase in homebuyers in January, according to a recent report from appraiser Miller Samuel Inc. and brokerage Douglas Elliman Real Estate. The report showed purchase contract for co-op apartments were more than double this time in 2020 and more than half of the contracts were for homes prices below $1 million. Last year’s exodus from the city due to COVID-19 created a dearth of potential homebuyers, forcing prices to go down. Now the advent of multiple vaccines, in conjunction with lower interest rates, have likely lured potential homebuyers back to snag previously much more expensive real estate.
Market volatility overshadows interest rates, home prices
Equity futures are falling in early Friday trading as volatility returned to the market. Earnings continue to be strong, but this week’s headlines are all about the “short squeeze” on companies like GameStop and AMC. Meanwhile, interest rates have come off their recent highs and have moderated a bit to settle into a trading range. We’re also closely watching the 10-year Treasury note which is currently trading at 1.07% after trading at a near-term high of 1.15%. We haven’t seen the 10-year note at that level since March 2020, the beginning of the pandemic. Mortgage rates also continue to hover near record lows and we’ll dive into that here shortly. The Dow rebounded quickly Thursday, gaining 600 points as broker restrictions were put in place to limit transactions for the heavily shorted stocks. For some investors, this was a signal of overheated valuation with potential for a bubble to be formed. Federal Reserve Chairman Jerome Powell didn’t echo that sentiment, and instead expressed his feeling that “financial stability vulnerabilities are all moderate.” The Fed wrapped up its January meeting this week leaving interest rates at zero and reinforcing its commitment to buying at least $120 billion worth of bonds each month. One thing the committee did change was adding “progress of vaccinations” to its list of things to watch that could affect the path of the economy. Powell did say he thinks that the surge in home prices is temporary, due to people working from home and the immediate increase in demand for more space. The initial Q4 gross domestic product reading released by the Commerce Department showed a gain of 4.0%, slightly below the 4.3% expectation. Overall, 2020 GDP declined by 3.5% from 2019 and by 2.5% for Q4 alone. Right now, the expectation is that growth will be slow to start 2021 at an annualized pace below 1%. However, depending on how quickly businesses can reopen and the progress of the vaccine rollout, there is optimism for strong recovery in the second half of this year. The Bureau of Economic Analysis released its personal income and expenditures data Friday morning, showing income rose by 0.6% in December 2020 while spending declined by 0.2% month over month. The PCE price index, which is a measuring point for inflation, increased by 0.4% in December with the real PCE, excluding food and energy, increased by 0.3%. YELLEN CONFIRMED Another important economic factor was cemented this week as Janet Yellen was sworn in as the first female Secretary of the Treasury. The former Fed chair shares many of the same sentiments about inflation as current chair Powell in that neither of them seems overly concerned about short-term inflation. Yellen said as much in her confirmation hearing when she expressed the government should take advantage of the Fed’s position and inject more stimulus dollars into the economy. As we stated earlier, the fear on the street is that the continued injection of money with rates around zero will create an asset bubble. HOME PRICES CONTINUE HOT STREAK Already high home prices are surging even higher according to the latest S&P CoreLogic Case-Shiller Home Price Index. Nationally, home prices shot up 9.5% annually in November. That wasn’t an anomaly, either. October’s annual home price gain went up by 8.4%. Buyer demand combined with limited supply continues to drive home prices higher especially in suburban areas. Low mortgage rates have supported the increase in prices, too, as they’ve helped keep a sort of balance to affordability. The latest Freddie Mac 30-year fixed-rate average shows rates moving back down, sitting at 2.73%. Freddie Mac’s Chief Economist Sam Khater noted in this week’s release that the lack of supply is going to be an issue for the foreseeable future as the low rates put upward pressure on demand. The Mortgage Bankers Association supports the higher home price data, showing that the average purchase loan amount hit a record high of $395,200 in its latest survey. The MBA’s report shows that both purchase and refinance applications have slowed over the last couple of weeks due to slight increases in interest rates. However, annually purchases and refinances are up 16% and 83%, respectively.
Markets continue record-setting rally as Biden unveils housing, economic plans
Markets were on a roll this week, rallying to record highs on Inauguration Day and continuing to rise as the week progressed. The Dow catapulted to a record close of 31,188.38 on Wednesday, with the communications sector pushing the S&P 500 to a record close of 3,851.85. Both indices hit record highs again Thursday morning before falling off slightly. The Nasdaq saw the biggest jump, gaining 2% to hit a record, spurred by Netflix’s report that far exceeded expectations. Tech continued the upward movement of the Nasdaq on Thursday as Apple vaulted by more than 3%. Tech earnings reports are due next week, and investors are generally bullish on the expected results. The markets did pull back slightly on Friday morning with some tech earnings falling short of expectations and growing doubt about the support for another $1.9 trillion stimulus plan. The 10-year Treasury note was trading down at 1.091% early Friday morning. The other factor that is casting a shadow over the rally is the concern of when we might hit a ceiling in equities. The last market correction occurred almost a year ago, on Feb. 27, 2020, just before the COVID-19 pandemic hit the economy in full force. That was just the 27th market correction since WWII. Some analysts feel the market is being too optimistic about the good news and not as wary of the weak economic data, rising infection rates and new strains of the virus. That being said, Goldman Sachs economists aren’t predicting a bear market and instead see long-term stabilization as the global economy balances itself out. Fresh unemployment data did little to move the market needle as investors are still positive about potential for another round of government stimulus support. The Labor Department’s report showed a total of 900,000 initial unemployment claims for the week ending Jan. 16. YELLEN’S PLANS AS TREASURY SECRETARY Former Federal Reserve Chair Janet Yellen is expected to be confirmed Friday as the first female Secretary of the Treasury. Speaking in a confirmation hearing in front of the Senate Finance Committee earlier in the week, Yellen reinforced the immediate goal of getting the American economy back on stable footing before moving ahead with any major policy changes. Yellen multiple times referred to impending financial reform after the COVID-19 pandemic was brought under control. She pointed to increasing taxes on wealthy Americans and corporations, but only if there was global support that would help keep American companies from using international loopholes to circumvent taxes. Trump’s 2017 tax cuts took the corporate tax rate down to 21% from 35%. Biden expressed on the campaign trail that he would like to raise that back up to 28%. Yellen echoed the sentiment that China has been enacting “abusive, unfair and illegal practices.” She added, “China is undercutting American companies by dumping products, erecting trade barriers and giving illegal subsidies to corporations.” However, Yellen took a departure from President Trump’s tactics and instead said she would rely on working with America’s allies to come to a resolution. Yellen also supported the ideal of a strong dollar as well as supporting further stimulus plans to get Americans on solid footing financially. BIDEN’S HOUSING PLAN President Biden continues to be vocal about how he would like to address housing in the coming months. His main objectives include a $15,000 first-time homebuyer tax credit that would be accessed immediately, therefore serving as more of down payment assistance than a rebate. Biden also plans to push big banks to expand into FHA lending, spur construction of single- and multifamily housing while enhancing the Community Reinvestment Act. Reducing the mortgage insurance premiums for FHA loans is an important point for Biden’s social justice reforms. FHA loans allow for as little as 3.5% down for a home, but anything below 20% tacks on mortgage insurance premiums that can last for the life of the loan. Helping people afford a home is only part of the issue. The next step would be making sure there are homes to buy. Biden’s plan outlines a $100 billion affordable housing fund for construction and rehabilitation of housing. A big piece of the rehab of homes is to make them more energy efficient. To that end, Biden wants to eliminate some zoning laws that have been used “to keep people of color and low-income families out of certain communities.” This idea faces a lot of headwinds including but not limited to cost and the Biden administration’s desire to remain environmentally conscious. Many of the regulations his plan would ease up on are environmental in nature and would contradict the desire for a greener building process. When it comes to cost, there are a myriad of problems. A builder survey this week showed single-family builders are concerned about “supply-side constraints related to lumber and other material costs, a lack of affordable lots and labor shortages that delay delivery times and put upward pressure on home prices.” Generally speaking, most of these initiatives will not be able to come to fruition until the economy is on a bit more stable ground. Interest rates are already slowly creeping up and the Fed will have to get to a point where it slows its purchase of mortgage-backed securities. Finding that balance in the coming months will help clear up the most pressing needs for housing. RATES ON THE MOVE, STILL HISTORICALLY LOW The latest averages from Freddie Mac show that interest rates for a 30-year fixed-rate mortgage went up slightly again last week, hitting 2.77%. Although not the lowest we’ve seen in the last year, that’s still nearly 100 basis points below what Americans were getting this time last year, and about 175 basis points lower than 2019’s average during this week. In the meantime, the Federal Housing Finance Authority has extended the moratorium on evictions and foreclosures through Feb. 28, 2021 for loans backed by Fannie Mae and Freddie Mac. The forbearance rate has dropped slightly as of Jan. 10, according to the Mortgage Bankers Association, but there are still around 2.7 million homeowners actively in forbearance plans. Moreover, the rate of borrowers exiting forbearance “remains much lower than what was seen in October and early November,” according to Mike Fratantoni, Senior Vice President and Chief Economist for the MBA. On the positive side, housing starts boomed in December, rising by 5.8% according to the Commerce Department. Permits for future homebuilding also increased by 4.5%. For eight straight months, single family starts have increased and overall, single-family homebuilding has increased by 12%. Those numbers indicate that we are on the fastest pace since 2006 for single-family housing starts. The chart below shows just how precipitous the drop was during the financial crisis and how much we’ve rebounded this year alone. While the construction pace is a positive, the same headwinds continue to work against homebuyers. The cost of new construction can offset the savings of historically low interest rates. More people are staying in their homes longer, including the hundreds of thousands of people who recently refinanced, which has greatly lessened supply. Supply has also been drained due to families moving away from cities in response to the COVID-19 pandemic in order to buy a home and get more space as they work remotely. All of these factors have put extreme upward pressure on home prices, yet another factor working against potential homebuyers.
10-year note yield on the rise, Biden plan revealed
A new stimulus plan has emerged as President-elect Biden starts to outline his immediate plans for COVID-19 relief. Initially the thought was the plan would be worth around $1.3 trillion, but Biden revealed a $1.9 trillion spending plan in line with what was enacted last summer with the CARES Act. Biden’s plan, titled the American Rescue Plan, would dole out $1,400 direct payments to most Americans, increase unemployment benefits and extend the moratoriums on evictions and foreclosures until the end of September 2021, among other features. Markets had mostly priced in the stimulus plan so trading was only slightly affected, with the Dow trading up 150 points early Thursday before closing relatively flat. The S&P 500 finished just under breakeven on the day with the Nasdaq hitting an all-time high, up 0.7% in intraday trading, only to close up just 0.3%. Tech stocks Facebook and Microsoft each fell by 1% with other FAANG stocks Amazon, Netflix and Alphabet all trending lower. Markets were also little affected by a second impeachment of President Donald Trump and not swayed by the news of a single-dose vaccine being tested effectively by Johnson & Johnson. Investors, while positive about the future of a Biden administration for its expected relative normalcy, seem to be keeping a realistic view of the next few months of the current economic issues related to COVID-19. The yield on the 10-year Treasury note was trading at 1.10% early Friday morning. Expect the trend to move higher the next few weeks as inflation expectations move higher, especially with the new Biden stimulus plan. Time will tell on what that plan ultimately looks like. Jobless claims surged to nearly 1 million this past week, hitting the highest level since August. The report of 965,000 initial unemployment claims from the Labor Department was in sharp contrast to the 800,000 predicted by Wall Street. Continuing claims also rose, jumping by almost 200,000 to hit 5.27 million. The numbers did little to jostle Wall Street, however, as Thursday’s announcement from President-elect Joe Biden stirred positivity among investors. The current COVID relief plan allows for an extra 11 weeks of unemployment insurance payments, which runs through March 14. This continues to support people who are self-employed or typically would not qualify for state benefits, plus those who have exhausted their time limit for state benefits. Retail sales released Friday morning showed a disheartening 0.7% drop in December, according to the Commerce Department. November’s data was also revised down to 1.4% from 1.1%. When you look at the core retail sales, which exclude readings for gasoline, building materials and food, retails sales dropped by 1.9%. EARNING SEASON SHOWS HEALTHY BANKS Fourth quarter earnings released this week show major financial institutions like JPMorgan Chase and Citigroup faring much better than expected during 2020. JPMorgan Chase hit Q4 earnings per share of $3.79 against the forecast of $2.62. Revenue for the bank hit $30.16 billion, nearly $1.5 billion more than what was expected. Meanwhile Citigroup was slightly below expectations with $16.5 billion in revenue and more than $2 per share in earnings. That equals out to about a 10% drop in revenue and a 7% dip in earnings. CEO Mike Corbat said the results show a definite sign of “strength and durability of our diversified franchise” as revenues were fairly flat compared to 2019. Both banks got a boost from releasing reserve funds they had set aside to help mitigate any loan losses due to COVID-19-related defaults. Jamie Dimon, JPMorgan’s CEO, said government stimulus as well as the debut of effective vaccines for COVID were two main reasons for releasing the reserves. JPMorgan and Citigroup released $2.9 billion and $1.5 billion in reserves, respectively. POWELL DOUBLES-DOWN ON RATE FORECAST Federal Reserve Chairman Jerome Powell says the Fed is going to stand pat on interest rates for the foreseeable future. Addressing the crowd during a Q&A sponsored by Princeton University, Powell made the Fed’s course of action clear. “When the time comes to raise interest rates, we’ll certainly do that,” said Powell. He continued, adding “that time, by the way, is no time soon.” Currently, the Fed is buying about $120 billion in bonds each month. The overnight lending rate continues to hover around zero with inflation sitting at 1.4%, well under the 2% target rate. Powell added during the Q&A that any long-term issues don’t present any “obvious imbalances that threatened the ongoing expansion.” FEAR OF RISING RATES SPURS MORTGAGE MARKET Refinance holdouts stormed the market in the first week of 2021 as the fear of missing out on the historically low rates finally caught up with them. The predictions of rising rates this year helped spur a 20% spike in home loan refinance applications, according to the Mortgage Bankers Association. Refinance volume was 93% higher than this time last year. MBA associate vice president of economic and industry forecasting, Joel Kan, said in the release, “Booming refinance activity in the first full week of 2021 caused mortgage applications to surge to their highest level since March 2020, despite most mortgage rates in the survey rising last week,” Kan continued, saying “The expectation of additional fiscal stimulus from the incoming administration, and the rollout of vaccines improving the outlook, drove Treasury yields and rates higher.” Another encouraging data point for the housing market is the marked improvement in purchase applications for new homes. The MBA’s Builder Application Survey Data for December shows a small increase of 0.2% month over month, but a whopping 42.2% annual increase in purchase applications for new homes. Again, the issue of price especially on new construction can cause problems for some homebuyers. The average loan size for a new home increased by about $10,000 in December, to $367,502. The main headwinds of price and availability are what continue to stymie the purchase market for now, rising just 8% week over week according to the MBA’s data. However, the silver lining is that 9.2% of the purchase applications were for FHA loans. That signals, according to Kan, “a positive sign of more lower-income and first-time homebuyers returning to the market.” While rates did increase, they still remain below 3% on average. Freddie Mac’s weekly survey showed an average of 2.79% for a 30-year fixed-rate mortgage. Chief Economist for Freddie Mac, Sam Khater, expects that while mortgage rates will increase, the jumps will remain modest, continuing to support demand for purchases and refinances. Another important piece of the housing industry to keep in mind is the end of many forbearance relief programs coming up in March. While forbearance rates have slowed, hitting 5.46% this past week according to the MBA, they’re not declining as fast as they were previously. And as homeowners stay in the forbearance cycle longer, the less likely it is for them to be able to get back on track.
Wall Street, mortgage markets unfazed by political unrest
Markets hit record-highs this week despite the tumult in Washington D.C. The day after the conflict on Capitol Hill and the confirmation of Joe Biden, the Nasdaq traded above 13,000 for the first time ever with the S&P up over 3,800 for the first time. The Dow jumped by 300 points during Thursday’s intraday trading and continues to trade above 31,000 points as of Friday morning. The tech-heavy Nasdaq hit a setback earlier this week, dropping by 1%. There is an expectation among investors that the Democratic-led executive and legislative branches will institute increased federal spending, more regulation and also increased capital gains taxes. However, economists also feel that the changes will be more gradual instead of sweeping in order to not upset a fragile economy. This week also marked the first time since March 2020 that the yield on the benchmark 10-year Treasury note rose above 1%. While the increase is an important psychological point, it will be important to watch the market’s expectation for inflation in the coming months and throughout the year. As this happens, expect to see the yield curve continue to steepen. Right now, the separation between yields on the 2- and 10-year notes is currently trading at 94 basis points. Multiple times during 2019 we saw the curve invert, which is usually a sign of impending recession. The curve also briefly inverted in February of 2020, just before the pandemic hit in full force. The markets also saw a boost due to positive manufacturing data. This week the Institute for Supply Management released its December analysis of manufacturing sentiment and activity, reporting at reading of 60.7–its highest since August 2018. Any reading above 50 signals an expansion of activity. The prices paid index also jumped by about 12 points to 77.6 from November to December. That is a significant jump, likely boosted mostly by the cost of commodities like oil, but it’s also an important inflation indicator. Overall, the increase in the prices paid does suggest the low supply and high demand for goods will put upward pressure on the price of domestic core goods. LACKLUSTER JOBS REPORT REINFORCES ECONOMIC ISSUES Both the Labor Department and ADP payroll reports show that, for the first time since April, the U.S. workforce has seen a reduction in jobs. The Labor Department’s monthly jobs report for December showed a loss of 140,000 jobs. That is drastically different than the 50,000-job gain predicted by economists. The unemployment rate held steady at 6.7%. Stock futures were unfazed by the news and continue the bullish run with Dow futures up nearly 100 points and the Nasdaq and S&P futures up 77 points and 13 points, respectively. Economists had also been expecting a modest gain in private payrolls, but ADP reported a decrease of 123,000 private sector jobs in December. As one might expect with reinforced lockdowns and curfews enacted due to a surge in COVID cases, the leisure and hospitality sector bore the brunt of the cuts with 58,000. Initial claims for unemployment remained steady, coming in at 787,000 for the week ending Jan. 2. The Labor Department’s report also shows continuing claims dipped by 126,000 to just over 5 million total. WHAT THIS MEANS FOR MORTGAGES This week the average on a 30-year fixed-rate mortgage dropped to 2.65%, according to Freddie Mac. That is yet another historic low. Economists have been saying for months that rates this low will continue into 2022 as the economy slowly recovers from the fallout of COVID. That was before the Senate runoff elections this week. Now, the prediction is that the slight Democratic advantage in Congress will start putting gradual upward pressure on rates. That being said, longer-term interest rates are likely to increase. Mortgage rates will tend to follow longer-term rates, but lenders will want to maintain capacity to continue to originate and have some margin to play with. That will keep mortgage rates lower on a relative basis. Mortgage institutions, like the Mortgage Bankers Association, have revised their 2021 forecasts to include higher interest rates due to the expected increase in federal spending. That means they also expect the refinance boom may have already hit its peak. MBA Chief Economist Mike Fratantoni said, “MBA anticipates refinance originations to be strong in 2021, but slowing from 2020 to around $1.19 trillion, The prospects of increased spending and deficits will likely put upward pressure on mortgage rates as the year progresses, which in turn could lead to the current refinance wave ending a little sooner.” The end of December brought a distinct slowdown in the home purchase market, despite interest rates remaining at historic lows. The Mortgage Bankers Association’s data shows just a 3% annual gain in purchases over the last two weeks of the month. Comparatively, the last few months have seen steady 20% annual purchase gains. Home prices are one obvious culprit. The latest S&P Case Shiller Index shows that, nationally, home prices rose 8.4% annually in October. That is up from 7% in September. It’s been more than ten years since the index has seen that kind of a one-month jump. The demographics of the price increase have also shifted dramatically. Typically, large cities on the coasts have seen the greater increase in prices due to lack of supply and strong demand. COVID-19 has changed that. Remote working environments have allowed people to spread out away from urban areas and find more spending power in smaller cities. Places like Kansas City, Boise, Pittsburgh and others have shown the strongest price gains right now, according to the Federal Housing Finance Agency.
Markets await Congress’ decision, mortgage rates hit another low
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.
Talks stall on Capitol Hill as market awaits stimulus plan
Congress has avoided a government shutdown, but there is no stimulus deal quite yet. Thursday, the House of Representatives adjourned after passing a week-long extension to government funding as Republicans and Democrats continue to debate over a second federal stimulus package. The lack of movement on Capitol Hill pushed Dow futures down by more than 200 points on Friday morning, setting up the major indices for their first negative week in almost a month. This drop happened despite positive news regarding COVID-19 vaccines, which are expected to begin distribution next week. Stocks were also affected by the dismal data concerning unemployment. Jobless claims jumped to their highest level since September, hitting 853,00 this past week. The Labor Department's report also shows continuing claims increased by 230,000. That's the first time that continuing claims have gone up since August. Treasury yields, which had been steadily climbing this week, slumped on Thursday in reaction to the news of unemployment and lack of agreement in Washington D.C. The benchmark 10-year note yield fell to 0.906% and was trading down at 0.891% early Friday morning. The rate of inflation over the past year has remained unchanged at 1.2%, according to the latest data from the Bureau of Labor Statistics. Moreover, consumer prices increased by just 0.2% in November, with cheaper gasoline and groceries offset by more expensive clothes, home furnishings, recreation and alcoholic drinks. Before the pandemic lockdowns and shutdowns began in March, inflation was running at a rate of 2.3%. HOME PRICES UP, SO IS HOME EQUITY Mortgage rates remained flat this week with the 30-year fixed rate mortgage average from Freddie Mac still coming in at 2.71%. What Freddie Mac's Chief Economist Sam Khater noted this week is rates "resisting their typical correlation to Treasury yields, which have recently been moving higher. Although today’s mortgage spread (average mortgage rate vs. 10-year Treasury yield) is about 1.8 percentage points and still has some room to move down if the 10-year Treasury continues to rise, it’s encouraging to see that the spread is almost back to normal levels," said Khater in the report. Due to the low rates, refinance activity picked up in the past week. The latest survey from the Mortgage Bankers Association showed a 2% increase in refinance application week-over-week, with an 89% increase annually. Joel Kan, the MBA's Associate Vice President of Economic and Industry Forecasting, noted that "The purchase market is also poised to finish 2020 on a strong note. Applications fell slightly last week but were around 3 percent higher than the two weeks leading up to Thanksgiving. Reversing the recent trend, there was also a shift in the composition of purchase applications, with an increase in government loans pushing the average loan balance lower." As we've talked about for several months now, the pandemic-influenced demand for homes combined with a serious lack of inventory have combined to drive home prices up. A silver lining in the pandemic housing world is the increase in homeowner equity. CoreLogic reports that skyrocketing home prices have equated to about $1 trillion in gained equity. The company's data shows that homeowners with mortgages have seen equity increase by 10.8%. In the report, CoreLogic's chief economist Frank Nothaft said the increase in equity is extremely important during uncertain financial times. “The average family with a home mortgage loan had $194,000 in home equity in the third quarter. This provides an important buffer to protect families if they experience financial difficulties.” Because of the increase in home equity, there's also been more than an 18% drop in borrowers with a negative equity position. That means borrowers who owe more than their house is worth. Currently, about 3% of homeowners are in a negative equity position.
Wall Street cruising despite jobs report speed bump, housing stays hot
While Wall Street continues to boom, the rest of the American economy is struggling to keep up. The November jobs report released Friday morning showed that fewer than 250,000 nonfarm payroll jobs were added in November, against estimates of 440,000. The unemployment rate overall did tick down to 6.7%, as did the labor force participation rate. While the gain of 245,000 jobs and a drop in unemployment might normally be touted as a strong report, in the era of COVID and millions of Americans unemployed, this is fairly disappointing. Private payrolls also slowed considerably in November. The ADP's monthly report showed a gain of just over 300,000 workers–well below the estimate of 475,000. October's numbers were upwardly revised to 404,000. Not surprisingly, November's numbers showed the largest increase came from the hospitality sector with small businesses adding 110,000 jobs. Job growth overall remains positive, yet also slow. On the other end of the spectrum, unemployment claims hit a pandemic-era low but still came in well above 700,000. The Labor Department's report shows 712,000 Americans filed initial unemployment claims over the last week with continuing claims dropping sharply by 569,000 to 5.52 million total. It's important to note that, recently, the Government Accountability Office reported that weekly jobless claims have not been accurate during the pandemic. Uncounted backlogs, fraud and other discrepancies were outlined by the GAO as the main issues with the reporting by the Labor Department. Despite the lackluster jobs data, Dow futures were still up by 120 points in early Friday trading, with the S&P 500 and Nasdaq up 0.4% and 0.3%, respectively. In the background, Congress has renewed talks of a federal stimulus package. For the first time since the election, House Speaker Nancy Pelosi and Senate Majority Leader Mitch McConnell discussed terms for another COVID stimulus deal with new motivation: potential for a government shutdown. The current government funding plan expires on Dec. 11, increasing impetus to get a stimulus deal done as well. Pelosi, along with Senate Minority leader Chuck Schumer, have apparently cut their demands, endorsing a smaller $908 billion package. The lack of progress on the second stimulus package has stymied Treasury yields. The benchmark 10-year Treasury note continues to flirt with the 1.00% mark but can't quite get over the hump. Thursday's 10-year note yield dipped back down to 0.908%. In early Friday morning trading, the 10-year note was trading at 0.951%. BEIGE BOOK OVERVIEW The markets were little affected by the Federal Reserve's last Beige Book release for the year. Overall, the various Federal Reserve Districts "characterized economic expansion as modest or moderate" since the last publication. When it comes to lending, banks were more concerned with commercial lending as related to leisure and hospitality with an increase in delinquencies in 2021 anticipated. While the general sentiment remains positive overall, optimism is waning as reported cases of COVID-19 tick upwards, expiration dates are approaching for unemployment benefits and the moratoriums on evictions and foreclosures come to a close. YELLEN AND HOUSING The week of Thanksgiving, President-elect Joe Biden nominated former Federal Reserve Chair Janet Yellen to be his Secretary of the Treasury. Many economists and politicians see Yellen as a mostly moderate voice and expect her to continue to take that same stance moving forward. They also feel that this nomination indicates support from the Biden administration to use more federal funds to stimulate the economy while also encouraging the Fed to keep interest rates low. The issue of conservatorship will likely be an early issue for Yellen. As it currently stands, Treasury Secretary Steve Mnuchin and Federal Housing Finance Agency director Mark Calabria are working to free government sponsored enterprises Fannie Mae and Freddie Mac from conservatorship. To do that, the GSEs have been allowed to retain more capital to build up the necessary funds. The general assumption is that, while it may not happen as fast as some on the Republican side would like, ending conservatorship of Fannie and Freddie will still be accomplished in coordination with Yellen, albeit at a slower pace. Six years ago, Yellen made her stance on the GSEs very clear, saying, “I think we still have a system that has systemic risk, that government funding remains critical to the mortgage sector, and I think to get the housing market back on its feet. It’s important for Congress to put in place a new system and to explicitly decide what the role of the government should be in helping the housing sector.” Yellen continued, “There are a variety of ways to do it, but I think the government should make its intended role more explicit and make sure that whatever entities are set up to deal with housing finance don’t create systemic risks to the financial system.” HOUSING STILL SOARING, BUT IS THERE A CEILING? Depending on which data set you look at, you could get a very different picture of where the housing market is headed. The Mortgage Bankers Association's latest report shows a 9% jump in weekly mortgage purchase activity with a whopping 28% annual increase. Refinances continue to dominate the landscape with an annual increase of 102% according to the MBA. The report also shows the average purchase loan amount hit $375,000–that's the highest on record since the MBA was created in 1990. Joel Kan, the MBA’s associate vice president of economic and industry forecasting, said "Purchase activity continued to show impressive year-over-year gains, with both the conventional and government segments of the market posting another week of growth." Kan went on to say, "Housing demand remains strong, and despite extremely tight inventory and rising prices, home sales are running at their strongest pace in over a decade.” Analysts at Freddie Mac take a little bit of a different point of view on what the purchase market means right now. This week, Freddie Mac's 30-year fixed-rate mortgage average dipped to yet another historic low, dropping to 2.71%. Sam Khater, Freddie Mac's chief economist, believes that, "Despite persistently low mortgage rates, home sales have hit a wall. While homebuyer appetite remains robust, the scarce inventory has effectively put a limit on how much higher sales can increase. Unfortunately, the record-low supply combined with strong demand means home prices are rapidly escalating and eroding the benefits of the low mortgage rate environment." In response to the sharp increase in home prices, Fannie and Freddie increased the conforming loan limit for 2021, from $510,400 to $548,250. The Federal Housing Administration followed suit this week, increasing its 2021 loan limit to $356,362. That's an increase of nearly $25,000. But, that loan limit is actually the floor for more high-cost cities. The FHA is required to set single-family forward loan limits at 115% of median house prices. For high-cost areas, the loan limits have a ceiling of up to 150% of median home prices. That would mean some areas will have a 2021 FHA loan limit of $822,375.
Economic recovery hits headwind as infection rates rise
The beginning of this week gave investors a decision between positive hope of a vaccine or negative reality of a spreading virus. It ended with a battle between the Federal Reserve and the Treasury. On Monday this week, the Dow Jones Industrial Average hit an all-time high of 29,950.44 when the announcement of a second COVID-19 vaccine was made. That was the Dow's first record close since February of this year. The S&P 500 also saw a record day on Monday, closing up 1.2% at a record 3,626.91. The news of the vaccine efficacy, and multiple companies conducting successful trials, pushed investors into value stocks. These kinds of stocks are shares of companies that provide services and make goods. These stocks have been largely down during COVID because of their reliance on a strong economic recovery. The chart below from CNBC shows where the peaks happened with the vaccine news from Moderna and Pfizer. But just as quickly as the markets hit record highs, they took another tumble with Wednesday's announcement by New York City Mayor Bill DeBlasio that they would close schools due to an increase in the positivity rate. California moved back to a limited stay at home order, essentially instituting a curfew for nonessential work and gatherings. The markets saw two straight days of losses after the Dow and S&P hit record highs. Thursday overnight trading saw Dow futures dipping by 200 points as the exponential increase in reported cases put a damper on the hopes of the vaccine helping lead to a quicker economic recovery. The 10-year Treasury note yield got close to going back over the 1.0% mark on the back of Monday's surge. But dismal government data on consumer spending pulled the yield back down later in the week. In early Friday morning trading, stocks were relatively flat and the 10-year Treasury note yield was trading at 0.846%. The retail sales report from the Commerce Department this week helped pushed Treasury yields down. Retail sales rose by just 0.3% in October, with core retail sales rising by just 0.1%. September's revised numbers also show concern, with core sales rising just 0.9% as opposed to the previously reported 1.4%. As lockdowns are reinstituted, and more Americans run out of federal financial support, the numbers are only expected to worsen in next month's report. Data from the Labor Department showed nearly 750,000 Americans filing initial unemployment claims this past week. That was higher than expected and also the first increase in four weeks. When you look at the four-week moving average, overall unemployment claims are down by more than 13,000. However, when you look at the chart below from CNBC, you see just how minimal any change has been since dramatic decreases earlier in the year. The silver lining is another decrease in continuing claims, which fell to 6.37 million. However, keep in mind that many people have run out of available benefits with just 26 weeks of unemployment payments allowed. Investors did get a little boost on Thursday as the Senate has reignited negotiations for further federal aid to those affected by the pandemic shutdowns. However, an impending battle between the Federal Reserve and the Treasury Department could shake up the economy even more. MNUCHIN, POWELL FACE OFF ON SUPPORT As we get closer to the end of the year, we are also inching closer to the end of many crisis-era programs instituted by the Treasury Department and the Federal Reserve that have, more or less, helped keep the economy afloat since March. Mnuchin outlined his plan in a letter to Fed Chair Jerome Powell. In it, he requests that the Fed return any unused funds distributed via the CARES Act so that the money could be reallocated by Congress. Under the $2 trillion CARES Act, $455 billion was allocated to the Treasury. That money was initially distributed to be used to fund things like the Main Street Lending Program and also as a vehicle to purchase corporate bonds. As of Thursday this week, the Fed had made $5.4 billion in Main Street loans with the Municipal Liquidity Facility issuing $1.7 billion in loans. The Fed rebutted that it would "prefer that the full suite of emergency facilities established during the coronavirus pandemic continue to serve their important role as a backstop for our still-strained and vulnerable economy." Mnuchin's plan allows for a 90-day extension to other programs involved which include supplying cash to core financial markets, like those for short-term corporate credit. Mnuchin's letter implied that the lending programs, if needed again, could be reinstated upon request by the Fed with funding from the Treasury's own fund or newly allocated Congressional money. MORTGAGE RATES DROP AGAIN, HOUSING HITS THE GAS For the thirteenth time this year, mortgage rates have hit a record low. Freddie Mac's 30-year fixed-rate mortgage average came in at 2.72% this week, with analysts citing weak consumer spending data as the reason for the decline. This week also marks seventeen straight weeks with the Freddie Mac 30-year fixed-rate average coming in below 3%. The housing market hit a small speed bump this month with the election, as expected, but the demand came back in full force the following week. The Mortgage Bankers Association's latest data shows Americans wasted no time getting back into the mortgage market, with weekly applications rising 4% for the week (seasonally adjusted). Annually, volume was up 26%. Refinances were up 98% annually. Existing home sales hit a fifth-straight month of increases, growing by 4.3% monthly in October and 26.6% annually, according to data from the National Association of Realtors. The NAR's report also outlines a record-low inventory of 2.5 months if we stay at the current sales pace. Not surprisingly, 72% of homes sold in October were listed for less than a month. The NAR's data also showed that the median price on an existing home jumped by 16% from this time last year, to $313,000. Builder confidence reached an all-time high in November. The National Association of Home Builders and Wells Fargo Housing Market Index reached 90 points, the highest since its inception 35 years ago. This was also only the third time the index broke 80 (scale from 0-100). This index is important because it measures not only current single-family home sales, but expectations for the next six months. The lingering issue with construction of new homes is affordability. Construction costs have skyrocketed during the pandemic, as multiple natural disasters have compounded the intense demand for lumber and other supplies. The tailwind for construction is the shift from cities to suburbs as families look for more space amid lockdowns. Low interest rates are also helping to balance the cost of supplies. *Due to the Thanksgiving Holiday, we will not have a Market Report next week.