The April 2024 edition of At A Glance, the Housing Finance Policy Center’s reference guide for mortgage and housing data, shows slowing house price appreciation, increased investments in agency MBS and lower net agency issuance so far in 2024 than a year previous. This edition features an analysis of loan-level GSE origination and performance data.
Inflation Will be the Gauge to Watch
In the past two years, mortgage origination activity has been very limited. Following historically low mortgage rates over the 2019-2021 period, mortgage rates soared reaching a peak of 7.8 percent in October 2023 (figure 2). High mortgage rates reduced homebuying affordability and in turn home sales. At the same time, higher mortgage rates disincentivized refinancing, rate-term refinancing in particular.
Higher mortgage rates largely reflect Federal Reserve tightening of its monetary policy, principally by raising the federal funds rate. The Fed’s Congressionally mandated monetary policy goals are maximum employment and price stability, which is defined as a 2 percent rate of inflation. While the unemployment rate is low, headline inflation, measured by the Consumer Price Index – Urban Consumers (CPI), exceeded its 2 percent threshold in March 2021 peaking at 9.1 percent in June 2022 (figure 1). Core inflation, which strips out more volatile food and energy prices, peaked at 6.6 percent September 2022. The federal reserve targets the PCE price index, which also showed accelerating inflation in Q1 2024.
In response to inflationary challenges, the mid-point of the federal funds rate rose from 0.125 percent in March 2022 to 5.38 in November 2023. The tighter stance of monetary policy seemed to pay off. Year-over-year change in headline CPI dropped from a high of 9.1 percent in June 2022 to 3.0 percent in June 2023 while core inflation slowed to 4.1 percent by October 2023. Amid the significant deceleration in consumer prices, the Fed communicated plans of reducing its key policy rate in 2024, partly because it also expected inflation to continue to slow toward its 2 percent threshold.
The 30-year fixed mortgage interest rate decreased from October 2023 to January 2024 (page 9). This spurred the refinance share of originations to jump several percentage points in February and March 2024 (page 10). The increase in the refi share is consistent with industry forecasts. These forecasts also projected stronger sales and construction activity in 2024 than in 2023 (page 20 & page 21). As a result, housing activity appears to have reached a low in 2023 as many experts looked towards 2024 with hope. Recent data requires a re-evaluation of that set of assumptions.
Inflation has not meaningfully changed since June 2023, remaining at a stubborn 3.5 percent headline and 3.8 percent for core as of March 2024 (figure 1). Headline CPI inflation (including food and energy) even shows some early signs of picking up again with small increases over the past two months. The index for shelter contributed significantly to this recent rise as consumers spent 5.7 percent more on housing in March 2024 than a year prior and 0.4 percent more than in the preceding month. Greater construction activity could go a long way towards reducing inflation as supply is the main driver of current unaffordability (page 23). However, amid low home purchase volume, construction starts on new single-family homes plateaued in 2023 (page 22).
The lack of continued progress on inflation has some Fed policy makers questioning the start of interest rate cuts or the number of cuts over 2024 out of concern for its implications for inflation. The most recent Fed projections now suggest a higher federal funds rate in 2025 and 2026 relative to their prediction in December 2023.
Despite no change to the federal funds rate itself, relatively more hawkish Fed communication have coincided with a renewed increase in the 30-year fixed mortgage interest rate, from 6.6 percent the week of December 29th to 7.1 percent the week of April 19th (figure 2). Higher mortgage rates could again weigh on the industry, putting into jeopardy the more optimistic forecasts of increased home sales and mortgage originations.