March 12, 2021

After a brief pause, mortgage rates continued their recent rise. Changes by Fannie Mae and Freddie Mac’s overseeing agency will likely make it more expensive to mortgage second homes and investment properties. And consumer optimism is finally showing signs of improvement.

Mortgage rates continue to rise

• Rates ticked up again this week, continuing their steady trend upward that has played out for most of 2021.
• The Producer Price Index – a read on inflation – rose 2.8% in February from a year before.

Mortgaging second homes or investment properties likely to get more expensive

• The FHFA will limit its purchases of loans secured by second homes or investment properties to just 7% of its portfolio.
• The policy takes effect April 1.

Broad consumer sentiment rises strongly

• The University of Michigan’s Index of Consumer Sentiment jumped 6.2 points from February to March to 83, its highest level in a year.
• Housing-specific sentiment ticked down slightly in February from January.

So what? 

Expectations for rising inflation and signs of an improving economy have combined to maintain upward pressure mortgage rates over the last couple months, and after a brief pause at the beginning of the week, mortgage rates pressed higher on Friday. The pattern is a continuation of one that has played out over the past few months, in which rates temporarily slow their rise or even fall before subsequently climbing again. Any reversals/downward movements in rates that have occurred in the past few weeks have been minimal, suggesting that the underlying trend in mortgage rates remains definitively upward. Generally, inflation weakens the value of Treasuries and other bonds, causing yields – and mortgage rates — to rise. While headline measures of inflation show that price pressures remain muted for now, some signs are emerging that prices may finally start to rise in the months to come. February’s 2.8% annual increase in the Producer Price Index – a measure of average selling prices that domestic producers of products receive – was the strongest since October 2018. The question now is whether the price pressures faced by producers will be passed through to consumers, or if the expected price increases are unfounded.

A separate mortgage-related development didn’t get as many headlines, but represents a considerable development in a key part of the housing market. The Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, announced that it would limit the number of new loans secured by second homes or investment properties to just 7% of its overall loan purchases – about half the share it has maintained historically. In response to the new policy, many mortgage lenders have, or reportedly will, place additional costs on loans associated with second homes, regardless of down payment size or other conditions. Initial assessments suggest that new policy is likely to have a significant impact on demand, particularly in warmer and or popular vacation destinations where second or investment properties are more common. The rental market, where investor ownership of one-to-four family properties is very common, may also be affected. $108 billion in mortgages associated with second homes or investment properties were originated in the Q4 2020 — 34% more than in Q4 2019. The policy will also likely make cash purchases of these properties more common.

In recent weeks, strong readings on consumer spending, purchases of durable goods and the labor market have reinforced the notion that the economy is iprimed for strong growth in the year to come, particularly as the country’s COVID-19 vaccine rollout continues to expand. But until this week, these improvements in broader economic readings hadn’t translated into added consumer confidence. That changed with the latest reading of the University of Michigan’s Index of Consumer Sentiment. The index rose 6.2 points in early March from February to reach its highest point since the pandemic began, and its forward-looking index of consumer expectations jumped 6.8 points from a month ago. Consumers’ willingness to engage with the service sector – including travel and restaurant industries – improved as well. A separate reading on housing market-specific sentiment didn’t match the boost in optimism, but still offered some silver linings. The 1.2 point monthly decrease in Fannie Mae’s Home Purchase Sentiment Index was driven by less optimism in home buying and home selling conditions from the month before, largely because of rising mortgage rates. Less than half of the survey’s respondents said February was a good time to buy a home – the first that that’s been the case since April – a setback likely influenced by rising prices and increased mortgage rates. But with only 17% of employed respondents saying they were concerned about losing their job – the fewest since September – and more than half of respondents saying they believed it’s a good time to sell, things look ready to improve as the economy continues to heal going forward.

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