The press conference following the Federal Reserve’s Open Market Committee’s (FOMC) December meeting went much as expected. But the one surprise was a big one.

Following another dismaying inflation number for November (an annual rate of 6.8%), the Fed was expected to step up the tapering of COVID related bond purchases and it did, paring them back by $30 billion a month rather than the $15 billion it announced last month. That would end the purchase program by March rather than June and set the stage for rate increases earlier than expected. The fed funds rate was left at near zero as it would be counterproductive to raise rates while still making accommodative purchases, but FOMC members announced a median expectation of three rate hikes next year. 

Mortgage Bankers Association (MBA) chief economist Mike Fratantoni said this “more hawkish view with respect to rate hikes may well have surprised the market.” He added, “Mortgage rates have been kept lower than they otherwise would have been through the Fed’s purchases of longer-term Treasuries and mortgage-backed securities. Going forward, MBA forecasts that mortgage rates will rise to 4% by the end of 2022 and may be more volatile as the Fed backs away from the market. Although this will lead to a drop in refinances, we expect that the strong economy will support an increase in home sales in 2022.”

Residential construction didn’t take a holiday last month; its performance surged well beyond what analysts had expected. Builders had signaled that they might have a surprise despite lingering supply chain issues, price increases, and what should be a seasonal slowdown. The National Association of Home Builders (NAHB) Index of Builder Confidence rose for the fourth straight month to an 84 reading.

Housing starts jumped 11.8% to a rate of 1.679 million, the highest level since March and the second highest on an annual basis. Permitting was up 3.6% to 1.712 million. Both stats were also higher on an annual basis with starts growing 8.3% and permits increasing 0.9%. The West performed well; starts increased 5.1% from a month earlier and permitting was up 4.6%

This newsletter will be on hiatus for the next two weeks with publication resuming on January 7. We hope your holidays are very enjoyable and that the new year will mark the beginning of a happy, healthy, and prosperous 2022!