Vaccine developments could spell the end of low interest rates

While long-term prospects are shaping up with announcements of a 94% effective vaccine, mortgage rates are paying more attention to the short-term troubles we’ll face as most of the country considers reimplementing social and business restrictions again. The 30-year fixed rate mortgage fell 11 basis points, sinking into 2s territory again at 2.90% while the 15-year fixed rate mortgage fell 8 basis points to 2.40%.

current outlook:

It’s been nearly seven months since Congress passed the CARES Act in March. And with recent advancements in vaccine trials, representatives may not feel as much urgency to pass another one. Meanwhile, distributing a vaccine (should one become viable) may be hindered by Trump’s unwillingness to work with the Biden administration

Vaccine developments could spell the end of low interest rates

Single-Family Dwellings Get a Running Start 

As we head into the winter season, a time of the year when we usually see a slow-down in the housing industry, many are still contemplating joining the market in order to take advantage of low rates. With the prospect of multiple, highly effective vaccine candidates, those hoping for a good bargain may be feeling pressed for time as any improvement in the economy will also mean an increase in rates.

To match this buying fervor, home builders are ramping up their production, particularly in the suburban single-family sector. Over the past ten months, single-family home permits grew 10.2% compared to the same time last year. All except eight states saw an increase, with Southern states reporting the most growth. Multi-family homes on the other hand fell 6.5% as consumers continue to spurn multi-unit properties for the more spacious single-family.

Federal Reserve to the Rescue 

Another aspect of recovery besides stimulus checks is the Federal Reserve and their policies to help out the economy and small businesses. So far, they have kept interest rates at 0% (as of their last FOMC meeting), have been purchasing assets at a rate of $120 billion a month, and have introduced a Main Street Lending program.

However, with the influx of new COVID-19 cases, they may need to make further contingency plans. While they haven’t made a definitive decision on whether they will increase their spending, JP Morgan’s Michael Feroli states the Fed will at least renew their $80-billion-per-month purchase of Treasuries through December. In addition, they may begin purchasing Treasuries with longer maturity dates. This will help keep long-term interest rates low, encouraging the purchase of interest-sensitive items like houses and automobiles. More will be determined at their next FOMC meeting on December 15 and 16.

Home Builders Bowl a Turkey 

For the third time in a row, the NAHB’s Housing Market Index (HMI) broke its former record, moving from 85 to 90 in November. To put this in context, before these past three months, the HMI has never surpassed the 80-point level. And, in April, at the turn of the pandemic, the index was at a measly 30.

All three components on which the index is based also increased. As it is, sales conditions is at 96, sales expectations is at 89, and buyer traffic is at 77. However as construction costs continue to go up and available lots get fewer and farther in between, this may limit builders’ abilities to produce affordable houses. In addition, as this survey occurred before election results were called, some builders’ attitudes may have changed with the knowledge of an incoming Biden administration.

“Construction costs continue to rise and interest rates are expected to move higher as more positive news emerges on the coronavirus vaccine front. In the short run, the shift of housing demand to lower density markets such as suburbs and exurbs with ongoing low resale inventory levels is supporting demand for home building.”

ROBERT DIETZ, NAHB Chief Economist
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