February 12, 2021

The path forward for the broader economy remains uncertain, but confidence in the housing market is on the rise. Mortgage rates are holding firm even as Treasury yields continue to rise. And access to most mortgages became easier in January.

Housing market sentiment improved in January, while overall economic optimism remained depressed

•  The Fannie Mae Home Purchase Sentiment Index increased to 77.7 in January, 3.7 points above December’s level.
• The University of Michigan’s Index of Consumer Sentiment fell 2.8 points in February from January, to 76.2 – its lowest level since August.

Weak inflation data helps keep mortgage rates low, for now

• Mortgage rates have stabilized in the last couple weeks, even as Treasury yields steadily rise.
• The consumer price index rose just 1.4% in the twelve months ending in January, below expectations and target levels.

Mortgages became slightly easier to access in January

• The Mortgage Bankers Association’s Mortgage Credit Availability Index – a measure of lending standards on home loans – increased by 2% in January from December.
• Lending standards on conventional loans eased by 4.8% on the month.

So what? 

While confidence in the broader economy slipped in February, housing market sentiment is on the rise, according to a report this week from Fannie Mae. After declining in December, the Fannie Mae Home Purchase Sentiment Index (HPSI) ticked upwards in January. Survey respondents demonstrated much stronger confidence in home selling conditions than they did in the previous month. The difference in the share of people who said it’s a good time to sell their home and those who think it’s a bad time to sell was 24 percentage points – up considerably from 8 percentage points in December and near the reading’s highest levels since the pandemic began. While the overall share of respondents saying it’s a good time to sell (57%) is still short of the pre-pandemic levels, the strong one-month increase in seller sentiment suggests homeowners are responding to rapidly-growing prices and may be gearing up to list their home for sale in coming months. The housing market-specific read on sentiment ran counter to a report from the University of Michigan, which showed consumers remain wary of the economy’s path in the coming months. The report’s index of consumer expectations slipped 4.2 points to its lowest level since August, a decline apparently driven by households with lower incomes, many of whom have likely been impacted by recent slowdowns in the labor market.

After fluctuating fairly significantly to begin the year, mortgage rates have recently stabilized and currently sit slightly above all-time lows. Inflation data released this week showed that price pressures remain tame and well below the Federal Reserve’s target growth rate. Modest inflation should help keep mortgage rates low by limiting the likelihood the central bank will tighten monetary policy anytime soon – through increased short-term interest rates or reduced asset purchases. That said, the relative flattening of rates has occurred even as Treasury yields – a measure that typically dictates the path of mortgage rates – have continued their gradual rise. Earlier in the pandemic, mortgage rates didn’t fall by nearly as much as their traditional relationship with Treasury yields would have suggested, which offered them more protection against upward movements. Now, that relationship has reversed – mortgage rates are lower than where Treasury yields would suggest they should be. The reasons for this aren’t entirely clear, but it does suggest a higher likelihood that mortgage rates will head upward than downward in the coming weeks and months. However, given the fact that inflation remains low and the Federal Reserve continues to reiterate its plans to use monetary policy to keep interest rates low, a significant upward spike in mortgage rates is unlikely.

A separate report on the mortgage industry suggests that lenders are increasingly willing to take on more risk when issuing loans. The Mortgage Bankers Association’s Mortgage Credit Availability Index – a measure of mortgage lending standards – eased in January from December to its most-lenient levels since July. Availability of credit associated with conforming loans and jumbo loans each rose strongly on the month, while availability of government loans – which are typically favored by borrowers with weaker credit – tightened slightly on the month. The easing conditions suggests lenders are more willing to consider applications from borrowers seeking conventional loans while putting less money down, something that should aid buying activity amid quickly rising home prices. Large down payment requirements are an increasingly high hurdle for many buyers who are looking to enter the market and reap the benefits of historically low mortgage rates.

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