Mortgage market digest
August 15, 2023
In my last newsletter, I emphasized the importance for readers who are bound by contracts to secure their interest rates. Monitoring expectations allows us to anticipate fluctuations in the bond market, especially in times of heightened volatility. It's prudent to exercise caution when projections indicate an elevated likelihood of inflation surpassing its typical levels. The latest data from July's Consumer Price Index (CPI) reveals a 0.2% increase in inflation, slightly falling short of initial estimates. Notably, mortgage rates experienced another upward surge in the past week.
On a yearly basis, however, the CPI escalated from 3% to 3.2% in the preceding month, though it remains close to its lowest point over the past two years. Core CPI, which excludes the more volatile food and energy costs, exhibited a 0.2% uptick, while the annual figure decreased from 4.8% to 4.7%.
According to Lance Lambert of Fortune Magazine, the mean 30-year fixed mortgage rate, as tracked by Mortgage News Daily, hasn't been below 6.85% since May 18th. It is anticipated that the latest data will likely place the rate at approximately 7.20%.
Understanding the dynamics of the bond market is key to predicting the daily shifts in mortgage rates. These rates are intricately tied to movements in the bond market, particularly concerning government bonds like U.S. Treasury bonds. As bond prices rise, they often exert downward pressure on mortgage rates, leading to mortgage rates going down.
Let’s Break This Down:
1. Inverse Relationship: There is an inverse relationship between bond prices and bond yields (interest rates). When bond prices rise, bond yields (interest rates) tend to fall, and vice versa.
This relationship is based on the fact that the yield on a bond is calculated by dividing the annual interest payment (coupon) by the bond's price. As the price of a bond goes up, the yield falls, and as the price falls, the yield rises.
2. Impact on Mortgage Rates: Mortgage rates tend to move in tandem with yields on long-term government bonds. This is because the yields on government bonds serve as a benchmark for determining the interest rates in various lending markets, including mortgages.
3. Investor Demand for Bonds: When bond prices rise, it often indicates increased demand for bonds. Investors are willing to pay a higher price for bonds because they see them as a safe haven or a relatively stable investment option. This higher demand for bonds pushes bond yields lower, including the yields on government bonds.
4. Mortgage Rates Fall: Mortgage lenders typically use the yields on government bonds as a reference point when setting mortgage rates. When yields on government bonds decrease due to rising bond prices, mortgage rates tend to follow suit and move lower.
Once more, it's important to note that mortgage rates may not always precisely mirror the movements of bond prices. Nevertheless, the correlation between these two factors remains a fundamental aspect in grasping the trends that dictate changes in mortgage rates.
Gaining a comprehensive grasp of monetary policy and the fluctuations in the Federal Funds rate holds immense importance, as it directly influences investors, access to capital, and the overall sentiment within the market. While the current series of rate hikes is not indefinite, it's plausible that elevated rates could persist for an extended duration. The escalation in mortgage rates has a direct correlation with reduced demand. Nonetheless, this scenario becomes particularly advantageous when viewed against the backdrop of a constrained housing supply. In such an environment, opting to purchase a home is a prudent decision.
This Wednesday, Fed Minutes will be released. We are about to receive valuable insights into the Federal Reserve's stance regarding potential rate hikes. The decisions made by the Fed are strongly influenced by the conditions of the job market.
Current market expectations for path of the Fed Funds Rate:
· Sep 20, 2023: Pause
· Nov 1, 2023: Pause
· Dec 13, 2023: Pause
· Jan 31, 2024: Pause
· Mar 20, 2024: Pause
· May 1, 2024: 25 bps cut to 5.00-5.25%
· Additional cuts to 4.17% by Jan 2025
With the onset of decreasing interest rates, the market is expected to witness heightened buyer activity, resulting in increased competitiveness. Simultaneously, there will likely be a rise in the number of homeowners opting to list their properties for sale.
AFFORDABILITY
In June, the Black Knight Home Price Index achieved an unprecedented peak, with nearly all major markets witnessing growth on a month-over-month basis. This signifies a robust surge in home prices, marked by a 0.7% upswing in June and a 0.8% elevation annually. The first half of the year has yielded an overall appreciation of 2.9%. Should this momentum persist, it is anticipated that home prices could experience a 5.8% increase by the close of 2023.
This upward trajectory aligns with observations from reputable sources like Case-Shiller, CoreLogic, Zillow, and the Federal Housing Finance Agency. These diverse sources have also documented robust growth in home prices, counteracting earlier forecasts that hinted at a potential housing market crash.
This data underscores the resilience of the housing market, offering prospects for individuals to amass wealth through property ownership and the subsequent appreciation of real estate values.
To recap, the recent upsurge in home prices, as illuminated by the Black Knight Home Price Index, echoes the positive trends evident in other housing market indicators. The substantial price upswings witnessed starkly contrast with dire predictions of a housing crash. This data underscores the current potential for individuals to invest in homeownership and gain from the wealth-building opportunities linked to property value appreciation.
Furthermore, the collective value of U.S. homes hit an all-time high of $47 trillion in June, highlighting the prevailing scarcity within the housing market.
This growth has effectively countered the $2.9 trillion reduction in value caused by the increase in mortgage rates between June 2022 and February 2023.
The present state of the housing market is marked by a distinctive combination of factors. Despite a relatively muted demand for homes, the supply remains restricted due to a lack of homeowners listing their properties for sale. This disequilibrium between supply and demand stands as a pivotal element driving the continued elevated values of homes.
A noteworthy element upholding these elevated home values is the prevalence of the 30-year fixed-rate mortgage within the United States. A substantial number of homeowners secured favorable mortgage terms during the pandemic era, often securing rates as low as 3% for the entirety of their 30-year loan periods. In fact, approximately 90% of homeowners currently possess rates below 6%. This trend has led many homeowners to refrain from selling unless a pressing need arises.
This phenomenon has engendered an environment where potential home buyers find themselves competing for a constrained inventory of homes, effectively averting a noteworthy decline in home values.
When in doubt remember the key fundamentals of supply and demand.
THE LABOR MARKET
The resilience of the labor market has been instrumental in averting a recession. The US non-farm payrolls have displayed consistent growth for 31 consecutive months. Presently, the unemployment rate stands at 3.5%, a slight increase from April 2023's reading of 3.4%. Jobless rates in the United States are hovering around or near record lows, as recorded since 1976. Interestingly, fewer individuals are resigning from their jobs. The trajectory of payroll growth is expected to continue over the next months, as the demand for labor continues to surpass the available work supply. Hourly earnings have surged by 4.36%, presently outpacing the rate of inflation. As long as individuals are engaged in employment, spending, and meeting financial obligations punctually, the demand for housing is projected to persist.
Notably, inflation trends are undergoing a shift. Following a twelve-month streak of declining US inflation rates (CPI), the figures escalated from 3% in June to 3.2% in July. Another increase in CPI is anticipated in August, with gas and oil prices potentially contributing to this upward trajectory. It's important to clarify that the inflation rate of change is measured on a yearly basis, not on a month-to-month basis. The CPI reading for August 2023 gauges the alterations in prices from August 2022, and this reading could potentially surpass expectations.
When mortgage rates initially moved out of the 2-3% range, the markets experienced a substantial impact. Real estate activity decelerated, and the values of stock portfolios dipped. Consumer confidence waned, and the media headlines echoed fears of foreclosures, bank crises, and an impending recession. Contrary to these predictions, the market response was quite the opposite, characterized by growth. Home prices surged, unemployment rates reached all-time lows, and the Dow Jones Industrial Average rebounded to recover all losses sustained in 2022. In fact, the Dow Jones achieved a new record high in terms of returns, leaving investors content. The sentiment towards equities (stocks) as opposed to bonds is presently the most positive it has been in the past 24 years.
In the words of Warren Buffett, "In the business world, the rearview mirror is always clearer than the windshield." This underscores the notion that hindsight often provides clearer insights than forward projections.
The workforce in America is actively employed, and their incomes are steadily increasing:
The recent pattern in Initial Jobless Claims has exhibited stability, consistently remaining under 230,000 for three consecutive weeks. However, the most recent reporting period recorded a noteworthy uptick of 21,000, with 248,000 individuals filing for unemployment benefits for the first time. This rise in claims could potentially signify a shift in the labor market, although it's vital to take other influencing factors into account.
On the front of Continuing Claims, which represent the number of individuals who are still receiving unemployment benefits following their initial filing, a decrease of 8,000 was observed. This decline is an encouraging sign and indicates that some individuals are successfully securing new employment or their benefits are expiring.
This decrease in Continuing Claims can be attributed to a blend of factors, including people finding new job opportunities and the expiration of their unemployment benefits. The downward trajectory in Continuing Claims since a peak in early April suggests a degree of recuperation within the labor market.
The relatively modest levels of Initial Jobless Claims over recent weeks can, in part, be attributed to the challenges businesses face in hiring qualified workers. Many establishments have reported difficulties in identifying suitable candidates for their available job positions.
An illuminating statistic from the National Federation of Independent Business reveals that 92% of small businesses aiming to hire in the prior month encountered difficulties in securing qualified workers for their openings. This underscores the incongruity between job vacancies and the available skilled workforce.
The pivotal question moving forward revolves around whether the recent uptick in Initial Jobless Claims is a transient aberration or the initial indication of an emerging upward trend. Vigilance is paramount, as subsequent reports will be crucial in determining whether this shift in data signals broader vulnerabilities in the labor market.
The next report is due Thursday.
Upcoming Events For The Week of August 14 - August 18, 2023
Economic indicators: The upcoming week's schedule reveals minimal data that could significantly impact rates. However, market attention will be on Tuesday's retail sales figures and Thursday's unemployment claims data. Indicators pointing to a robust economy tend to unfavorably influence mortgage rates. Federal Reserve Actions: The potential for mortgage rates to improve becomes challenging if market sentiment inclines towards the belief that the Federal Reserve might implement another policy rate hike in the current year. Notably, mortgage rates are unlikely to experience substantial downward movement until the Federal Reserve starts reducing its policy rate, an action projected to occur no sooner than next year.