The Fed’s decision may mean 0% interest for years to come

Rates came careening down after FHFA delayed the implementation of its new refinance fee to December 1st and after consistent positive performance in the bond market. As such, rates have dropped back down to the high 2s. The 30-year fixed rate mortgage fell by 23 basis points to hit 2.86% while the 15-year dropped 20 basis points to hit 2.40%.

Current Outlook

According to ISM reports, U.S. manufacturing grew higher than expected for the third straight month. Meanwhile, construction spending has also grown and the Federal Reserve has taken measures that may ensure rates stay low for a long long time. Unfortunately, while some areas of the economy have been showing gradual signs of recovery, those hit hardest by COVID-19 continue to fall behind as forbearance numbers continue to stagnate and foreclosure concerns loom ahead.

Mortgage Market Insider Weekly Rates Update Sep 1, 2020

The Fed Changes Its Tune on Inflation

The Fed’s new discretionary policy is probably just what the doctor ordered in these unprecedented times. Traditionally, the Federal Reserve has maintained a dual purpose in encouraging a strong labor market while keeping inflation rates at 2%. Under this new strategy, the Federal Reserve will give themselves more flexibility by using an average inflation targeting strategy rather than “tying (themselves) to a particular mathematical formula.” This indicates that they are willing to let the inflation rate rise past 2%, so long as they maintain an average inflation rate of 2%. It also means that rates will probably stay near zero for years to come.

However, the Fed’s dovish strategy introduces some uncertainty into markets, leaving participants guessing at the Fed’s intentions and allowing for the possibility of dramatic movements once those intentions become clear. For consumers, it means that rates for short-term debt like home equity lines of credit will stay low. However, this also means that savings accounts and certificates of deposit will earn less in interest. Meanwhile, long-term debt like mortgages will continue to depend more on the actions of investors in the bond market than changes to the Federal Funds Rate.

F is for Forbearance (and Foreclosure)

Forbearance numbers are starting to plateau after steady weeks of drops. Approximately 7.4% of active mortgages are in forbearance. That number has virtually stayed the same for the past two weeks. In fact, only 1,000 fewer mortgages were in forbearance for the week ending in August 25 than in the previous week. Signs point to homeowners using forbearance as a long-term financial solution as nearly 75% of those in forbearance have made use of an extension of their original 90-day plan.

On a more positive note, the number of foreclosures is down a whopping 83% from last year and Fannie Mae and Freddie Mac recently extended their foreclosure moratorium by another four months to December 31. However, because this moratorium may not extend past 2020, the New Year could signal the start of foreclosure season. According to ATTOM Data Solutions, 1 million houses are expected to be foreclosed on over the next 18 months.

Private Construction Catches Home Fever

Residential spending propped up overall construction spending for the month of July. After four consecutive months of declines, it increased 2.0% from last month and 0.5% from last year. This is in line with what we would expect after July’s growth in building permits and housing starts. Contributing to this is a surge in both single-family and multi-family spending by 3.1% and 4.9% respectively. Commercial spending on the other hand continues to fall, with $2.6 billion less dollars spent in July. As a whole, private non-residential construction fell 4.3% from last year.

"Fed Chair Powell [unveiled] a major shift in monetary policy to allow inflation and unemployment to run higher, which abandons decades of precedent and ensures that rates will stay low for years to come."

ROB CHRISMAN, Board of Directors for the California Mortgage Bankers
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