Mortgage Rates Remain Virtually Flat

September 16, 2021

It’s Groundhog Day for mortgage rates, as they have remained virtually flat for over two months. The holding pattern in rates reflects the markets’ view that the prospects for the economy have dimmed somewhat due to the rebound in new COVID cases. While our collective attention is on the pandemic, fundamental changes in the economy are occurring, such as increased migration, the extended continuation of remote work, increased use of automation, and the focus on a more energy efficient and resilient economy. These factors will likely lead to significant investment and new post-pandemic economic models that will spur economic growth.

Week of September 13, 2021 in Review

The economic calendar was relatively quiet, but news on consumer inflation, housing, jobless claims and retail sales made headlines.

Consumer inflation as measured by the Consumer Price Index (CPI) rose by 0.3% in August, which was in line with expectations. The year over year reading moderated slightly from 5.4% to 5.3%. Core CPI, which strips out volatile food and energy prices, rose by 0.1%, though this was lower than expectations. On a year over year basis, Core CPI decreased from 4.3% to 4%.

Inflation is critical to monitor because rising inflation reduces a Bond’s fixed rate of return. In other words, inflation can cause Mortgage Bonds to worsen or lose value and the home loan rates tied to them to rise. Does the decline in the annual CPI readings indicate that further decreases in inflation are ahead? Read on for important analysis about this. 

In housing news, Zillow’s Rental Index report showed that rents rose 1.7% in August and 11.5% year over year. Zillow also said that home prices rose 1.8% in August and 17.7% year over year. They reported that inventory, although trending higher month over month, is still down 23% annually. Zillow also forecast that home values will grow nearly 12% over the next 12 months, which is very strong.

The ongoing dynamic of high demand and low inventory of homes has been a major factor in the rise in rental and home prices. Some people have wondered if the number of homes that will be leaving forbearance this fall will have an impact on inventory, as millions of homeowners paused or lowered their mortgage payments by entering forbearance during the pandemic in an effort to avoid foreclosure. We breakdown some important numbers about this below.

Initial Jobless Claims did tick higher in the latest week, as the number of people filing for unemployment benefits for the first time rose 20,000 to 332,000. While this was a move in the wrong direction, claims are getting closer to pre-pandemic levels of 180,000 to 200,000 new claims each week. In addition, the number of people continuing to receive regular benefits declined to a pandemic era low.

In other news, shoppers were out in droves last month as Retail Sales were much stronger than anticipated, rising 0.7% from July to August versus the expected 0.8% decrease. When stripping out car sales, which have been hindered by the ongoing chip shortage, sales rose 1.8%. However, sales in July were revised lower from a loss of 1.1% to a loss of 1.8%.

Lastly, there was positive news from the manufacturing sector, as regional reports for both New York and Philadelphia beat expectations in September. It will be important to see if these reports signal continued expansion or if ongoing supply chain issues will remain a headwind.

Moderating Inflation Start of a Trend?

The Consumer Price Index (CPI), which measures inflation on the consumer level, rose by 0.3% in August and was in line with expectations. The year over year reading moderated slightly from 5.4% to 5.3%.

Core CPI, which strips out volatile food and energy prices, rose by 0.1%, though this was lower than expectations. On a year over year basis, Core CPI decreased from 4.3% to 4%.

Within the report, rents rose 0.3% in August and 2.1% on a year over year basis. However, the CPI report is not capturing the increases we are seeing in rents that are being reported elsewhere showing around 2% increases in August and up double digit increases year over year, such as the data from Zillow below. We may see some catch up in this CPI data in future months but for now the reporting is being dragged down by their methodology.

One of the main questions about the August CPI numbers is whether this slight moderation in inflation is a sign that inflation will continue to fall in the months ahead?

Remember that to calculate year-over-year inflation, the readings for the more current months replace the older readings from 2020 (for e.g., the readings for August 2021 replaced the readings for August 2020). The monthly reading for August 2020 for both headline and Core CPI was 0.4%. It was replaced by 0.3% for headline CPI and 0.1% for Core CPI from this August, which is why both annual readings in August declined.

However, the next several readings from 2020 were much lower, so if we continue to see monthly increases going forward this fall, the year over year CPI figures could start to accelerate again.

On a related note, the National Federation of Independent Business Small Business Optimism Index showed that companies that expect higher selling prices rose 3 points to 49%, which is a 41-year high. This points to continued inflation from small businesses.

Rents On the Rise

Zillow released their Rental Index report, showing that rents rose 1.7% in August and 11.5% year over year. Zillow also said that home prices rose 1.8% in August and 17.7% from the same time last year. They forecast that home values will grow nearly 12% over the next 12 months, which is very strong.

Zillow also reported that although inventory is trending higher month over month, it is still down 23% from August of last year.

While some pundits have predicted that a lot of inventory will hit the market due to homes leaving forbearance this fall, it’s important to really analyze the numbers.

Initially about 5 million entered forbearance and of those who exited thus far:

�  23% are now current

�  13% made a lump sum reinstatement payment to bring their account current

�  7% paid off loans through forbearance or a home sale (with no issues selling homes in this market)

�  28% have deferral plans or partial claims

�  12% exited forbearance into a loan modification

�  16% cancelled without a loss mitigation (in process of modification or still need to be reached)

�  Only 0.65% of exits to date have been into other resolutions which include short sales

Currently, there are around 1.5 million still in forbearance. If the above numbers continued, this would mean that only around 9,750 homes would go into some type of short sale or foreclosure. Given the record low inventory of homes currently on the market, this amount would be easily absorbed without having much of an impact on rising rental or home prices.

Initial Jobless Claims Tick Higher

Initial Jobless Claims rose by 20,000 in the latest week, as the number of people filing for unemployment benefits for the first time was reported at 332,000. While this was a move in the wrong direction, claims are getting closer to pre-pandemic levels of 180,000 to 200,000 new claims each week.

Continuing Claims, which measure people continuing to receive regular benefits, did reach a pandemic-era low, declining 187,000 to 2.67 million.

The number of people receiving the extended $300 benefits decreased by 212,000. However, Pandemic Unemployment Assistance Claims (which provide benefits to people who would not usually qualify) and Pandemic Emergency Claims (which extend benefits after regular benefits expire), rose by a combined 397,000.

As of this latest report, 12 million people are still receiving benefits throughout all programs, which is up 179,000 from the previous report. Remember that although the extra and pandemic-specific benefits expired on Labor Day, the metrics within this report are delayed by one to three weeks, so we won’t see the impact of the expiration for a few weeks.

What to Look for This Week

Housing news will dominate this week’s economic calendar, beginning Monday with the National Association of Home Builders Housing Market Index, which will provide an update on builder confidence for September.

On Tuesday, we’ll get an update on Housing Starts and Building Permits for August. On Wednesday, August Existing Home Sales will be reported while New Home Sales follows on Friday.

The latest Jobless Claims data will be reported as usual on Thursday.

Investors will also be watching Tuesday’s 20-year Bond auction for the level of demand, while the Fed will also be making headlines with Wednesday’s press conference and Monetary Policy Statement following their two-day FOMC meeting.

Technical Picture

After breaking beneath their 100-day Moving Average last Thursday, Mortgage Bonds moved lower Friday where they tested an important floor of support at the 100.863 Fibonacci level and then rebounded higher. The 10-year tested the 1.37% ceiling and then bounced lower and is battling with its 200-day Moving Average.

Mortgage Rates Remain Relatively Flat

While the economy continues to grow, it has lost momentum over the last two months due to the current wave of new COVID cases that has led to weaker employment, lower spending and declining consumer confidence. Consequently, mortgage rates dropped early this summer and have stayed steady despite increases in inflation caused by supply and demand imbalances. The net result for housing is that these low and stable rates allow consumers more time to find the homes they are looking to purchase.

Week of September 6, 2021 in Review

Wholesale inflation set a new record high while home price appreciation also remains red hot. Over in the labor sector, Initial Jobless Claims reached their lowest level since the start of the pandemic.

The Producer Price Index (PPI) showed that wholesale inflation rose 0.7% in August and 8.3% on a year over year basis. The annual reading was up from 7.8% in July and is a new record high. Core PPI, which strips out volatile food and energy prices, was also hotter on an annual basis than economists had forecasted. Inflation is critical to monitor because rising inflation can have a big impact on Mortgage Bonds and the home loan rates tied to them. See our important explanation about this below.

Hot home prices matched the hot temperatures in July, with prices up 1.8% from June and 18% year over year, per CoreLogic’s Home Price Index. This is an increase from the 17.2% annual gain reported in June.

The ongoing dynamic of low supply and high demand for homes around the country has been a key reason that home prices have appreciated. There was some good news related to this in the recent Jobs Report for August from the Bureau of Labor Statistics. Residential construction employment grew by 17,400 in August, which will likely help builders tackle their current backlogs of orders and may help the supply of new homes, which is desperately needed.

In other employment news, Initial Jobless Claims fell by 35,000 in the latest week, as the number of people filing for benefits for the first time was reported at 310,000 – the lowest level since the pandemic began. The number of people continuing to receive regular benefits also reached a pandemic era low.

All told, 11.9 million people are still receiving benefits throughout all programs, which is 256,000 less than the previous report. Note that extended and pandemic-related benefits expired on Labor Day. This should be reflected in reporting that starts in two weeks, given the delay in the metrics for this data.

Lastly, investors were closely watching Wednesday’s 10-year Treasury Note auction and Thursday’s 30-year Bond auction to see the level of demand. Find out the results below.

Wholesale Inflation Sets a Record High

The Producer Price Index (PPI), which measures inflation on the wholesale level, rose 0.7% in August and 8.3% on a year over year basis. The annual reading was up from 7.8% in July and is a new record high.

Core PPI, which strips out volatile food and energy prices, rose 0.6% in August and 6.7% on a year over year basis. This was hotter than expectations and up from 6.6% in July.

Rising inflation is always important to monitor because inflation erodes a Bond’s fixed rate of return. In other words, rising inflation can cause Bonds to worsen or lose value. This includes Mortgage Bonds, to which home loan rates are inversely tied. When Mortgage Bonds move lower, be it due to rising inflation or other reasons, home loan rates can move higher.

Though many factors influence the markets, inflation – and whether it continues to rise –remains crucial to monitor in the months ahead.

The Fed continues to stand by their position that the increase we have seen in inflation is transitory. However, we have seen wages continue to rise as well, which is typically stickier inflation. The Atlanta Fed’s Wage Growth Tracker, which has been lagging other reports regarding wage growth, showed a 3.9% annual increase in August. This matches the quickest pace of wage gains since 2008.

The increase in wages and inflation are going to be components the Fed has to keep in mind when deciding when to taper their purchases of Mortgage Backed Securities and Treasures, which have been ongoing to help stabilize the markets. The weak August Jobs Report and the Delta variant could also impact the Fed’s timing, possibly leading to a delay.

Appreciation Continues to Accelerate

CoreLogic released their Home Price Index report for July, showing that home prices rose by 1.8% from June and 18% year over year, which is an increase from the 17.2% annual gain reported in June.

Within the report, the hottest markets were Phoenix (+30%), San Diego (+24%) and Las Vegas (+21%).

A key reason for the rise in home prices has been the ongoing dynamic of low supply and high demand for homes around the country. There was some good news related to this in the recent Jobs Report for August from the Bureau of Labor Statistics. Residential construction employment grew by 17,400 in August, which will likely help builders tackle their current backlogs of orders and may help the supply of new homes, which is desperately needed. Residential building employment is now up 5% above pre-pandemic levels.

CoreLogic forecasts that home prices will rise 0.7% in August and 2.7% in the year going forward. But remember they remain conservative in their forecasting and continue to miss on the low side. For example, CoreLogic had forecasted prices for July would only rise by 0.7% and prices ended up increasing by 1.8%. On an annual basis, they are forecasting that prices will rise 2.7%, which is lower than their 3.2% annual forecast in June and lower than most other forecasts that have been made.

Initial Jobless Claims Hit Another Pandemic Era Low

The number of people filing for unemployment benefits for the first time fell 35,000 in the latest week, as Initial Jobless Claims were reported at 310,000. This is the lowest level of first-time filers since the pandemic began. California (+62K), Texas (+19K) and New York (+15K) reported the largest number of claims.

Continuing Claims also fell 22,000 to 2.8 million. This brought the number of people continuing to receive regular benefits to a new Covid-era low after the upward revision to the previous report.The number of people receiving the extended $300 benefits increased nearly 200,000. However, Pandemic Unemployment Assistance Claims (which provide benefits to people who would not usually qualify) and Pandemic Emergency Claims (which extend benefits after regular benefits expire) fell by a combined 315,000.

Note that while the extended and pandemic benefits expired on Labor Day, the metrics within the Jobless Claims report are delayed, meaning we won’t see the impact of this expiration until we see the report in two weeks.

As of the latest reporting, 11.9 million people are still receiving benefits throughout all programs, which is 256,000 less than the previous report.

On a related note, the JOLTS (Job Openings and Labor Turnover Survey) showed that there were almost 11 million job openings in July. It will be important to see if the start of the school year and the end of extended and pandemic benefits will result in some of these positions being filled. It’s estimated that 7.5 million people have lost all their unemployment benefits, while another 3 million will no longer receive the extra $300 due to the expiration of these programs.

The lack of workers almost certainly played a role in the disappointing August Jobs Report from the Bureau of Labor Statistics, with just 235,000 new jobs reported – far below the 750,000 expected. In addition to the 11 million job openings reported via JOLTS, the National Federation of Independent Business recently reported that plans to hire and positions not able to fill both hit a 48-year record. Compensation was also at a 48-year high, as business are trying to attract workers.

Note and Bond Auctions Have Strong Results

Investors were closely watching Wednesday’s 10-year Treasury Note auction and Thursday’s 30-year Bond auction to see the level of demand. High demand, which is reflected in the purchasing of Bonds and Treasuries, can push prices higher and yields or rates lower.

Weak demand, on the other hand, can signal that investors think yields will continue to move higher, which can have a negative effect on rates.

The 10-Year Treasury Note auction was met with strong demand. The bid to cover of 2.59 was better than the one-year average of 2.42. Direct and indirect bidders took 87.7% of the auction compared to 78.4% in the previous 12. The 30-year Bond auction was also met with above average demand. The bid to cover of 2.49 was above the one-year average of 2.31. Direct and indirect bidders took 86.9% of the auction compared to 80.5% in the previous 12.

What to Look for This Week

More inflation news follows this week on Tuesday, when the Consumer Price Index for August is released. We’ll also get an update Tuesday on how small businesses were feeling in August via the National Federation of Independent Business Small Business Optimism Index.

The markets will also be watching for the latest news on regional manufacturing when September’s Empire State Index (which measures the New York region) and Philadelphia Fed Index are released Wednesday and Thursday, respectively.

Also on Thursday, the latest Jobless Claims figures will be reported along with August’s Retail Sales data.

Technical Picture

Mortgage Bonds ended last week battling their 25-day Moving Average. If they break below this level, the next floor of support is their 100-day Moving Average. The 10-year is testing resistance at its 200-day Moving Average, which will hopefully keep a lid on yields.

Mortgage Rates Stay Flat

September 2, 2021

Economic growth and the acceleration in inflation have moderated in the last month, giving the markets comfort and leading to a stabilization in mortgage rates. Heading into the fall, home purchase demand is stable, home sales remain firm and above pre-pandemic levels, and inventory of unsold homes is tight but improving modestly. These factors will allow for home price pressures to ease over the remainder of the year.

Week of August 30, 2021 in Review

August brought disappointing news from the labor sector, as job growth was much lower than expected. Meanwhile, home price appreciation continues at a record setting pace.

Just 235,000 jobs were created in August, the Bureau of Labor Statistics (BLS) reported, which was much lower than expectations of 750,000 new jobs. However, positive revisions to the data for June and July adding 134,000 new jobs in those months combined took some of the sting out of the disappointing news. The Unemployment Rate fell from 5.4% to 5.2% but an increase may be ahead, as explained below.

Private sector job creations were also much lower than expected in August. The ADP Employment Report showed a gain of 374,000 jobs, coming in below the expected 500,000 to 600,000 new jobs. Job gains were reported across all sizes of business, with leisure and hospitality jobs again showing a large increase as businesses open and people are traveling more.

On a positive note, Initial and Continuing Jobless Claims both reached post-pandemic lows in the latest week, reported at 340,000 and 2.7 million, respectively. All in all, 12.2 million people are still receiving benefits throughout all programs. With the extra benefits expiring this week, these figures are expected to improve even further in the coming months.

The low supply of existing homes remained a challenge for buyers around the country in July, as evidenced by the 1.8% drop in Pending Home Sales (which measure signed contracts). Lawrence Yun, chief economist for the National Association of Realtors, explained that there is still not enough supply to match demand, but inventory is slowly increasing and he expects that buyers should have more options in the coming months.

The low supply and high demand for home has helped home prices continue to appreciate. The Case-Shiller Home Price Index showed that prices rose 2.2% from May to June and they were up a record 18.6% annually in June. The Federal Housing Finance Agency (FHFA), which measures home price appreciation on single-family homes with conforming loan amounts, also came in strong. It showed that home prices rose 1.6% from May to June and 18.8% year over year.

And that’s not all. Rents are also rising at a feverish pace. Apartment List reported that rents rose 2.1% in August and a staggering 13.8% year to date. This is the fastest rent growth on record and is on a 20% pace if these increases continue.

August Job Creations Much Lower Than Expected

The Bureau of Labor Statistics (BLS) reported that there were 235,000 jobs created in August, which was much weaker than the 750,000 new jobs that were expected. However, there were positive revisions to that data for June and July, adding 134,000 new jobs created in those months combined.

It’s important to understand that there are two reports within the Jobs Report and there is a fundamental difference between them. The Business Survey is where the headline job number comes from and it’s based predominately on modeling.

The Household Survey, where the Unemployment Rate comes from, is done by actual phone calls to 60,000 homes. The Household Survey also has a job loss or creation component, and it showed there were 509,000 job creations, while the labor force increased by 190,000. The number of unemployed people decreased by 318,000, causing the Unemployment Rate to fall from 5.4% to 5.2%.

However, the true Unemployment Rate is higher than the headline figure. There is an ongoing misclassification error where people were classified absent from work for other reasons and not marked as unemployed on temporary layoff when they should have been. When we factor this into the calculations, the Unemployment Rate should have been around 0.3% higher, putting it closer to 5.5%.

In addition, there are 5.7 million people who have not looked for work in the last four weeks who are also not counted in the labor force or counted as unemployed. With extra benefits now expiring, some of these individuals are going to start looking for work again and will be counted in the calculations. This could actually cause the Unemployment Rate to move higher in the coming months until they find employment.

Wages were also on the rise. Average hourly earnings were up 0.6% from July to August and they also rose 4.3% year over year. Average weekly earnings, which we focus on more because it measures what people actually take home, also increased 0.6% month over month. Year over year, weekly earnings rose 4.6%, but if we extrapolate the last few months on a year over year basis, the increase in weekly earnings is closer to 7%, which is more indicative of what we are seeing.

Private Payrolls Also Disappoint

The ADP Employment Report, which measures private sector payrolls, showed that there were 374,000 jobs created in August, which was much lower than expectations of between 500,000 to 600,000 new jobs. Additionally, July’s report was revised lower by 4,000 jobs, bringing the total number of jobs created in July to 326,000.

The services sector again led the way with 329,000 job creations, with the bulk of these new jobs coming in the leisure and hospitality sector (+201,000). The goods producing sector increased by 45,000 jobs.

Job gains were reported across all sizes of businesses. Small businesses (1-49 employees) gained 86,000 jobs, mid-sized businesses (50-499 employees) gained 149,000 jobs, and large businesses (500 or more employees) gained 138,000 jobs.

Initial Jobless Claims Reach New Post-Pandemic Low

On a a positive note, the number of people filing for unemployment for the first time reached a new post-pandemic low in the latest week, with Initial Jobless Claims dropping 14,000 to 340,000. California (+60K), Texas (+19K) and New York (+18K) reported the largest number of claims.

Continuing Claims fell 160,000 to 2.7 million, meaning the number of people continuing to receive regular benefits also reached a post-pandemic low.

The number of people receiving extended benefits decreased by 237,000. However, Pandemic Unemployment Assistance Claims (which provide benefits to people who would not usually qualify) and Pandemic Emergency Claims (which extend benefits after regular benefits expire) rose by a combined 414,000.

All in all, 12.2 million people are still receiving benefits throughout all programs, which is up 178,000 from the previous report. Remember that extra benefits expire this week, which should cause these figures to significantly improve in the coming months. Plus, as kids across the country return to school, many parents may be able to return to the labor force.

Record-High Home Price Appreciation

The Case-Shiller Home Price Index, which is considered the “gold standard” for appreciation, showed home prices rose 2.2% in June and 18.6% year over year. This annual reading set a record and is also almost 2% higher than the annual price gains seen in May.

The 20-city index rose 19% year over year, with almost all the cities showing strong gains. Phoenix (+29%), San Diego (+27%), and Seattle (+25%) continued to report the highest annual gains.

The Federal Housing Finance Agency (FHFA) also released their House Price Index, which measures home price appreciation on single-family homes with conforming loan amounts. While you can have a million-dollar home with a conforming loan amount, the report most likely represents lower-priced homes, where supply is tightest and demand is strongest.

Home price rose 1.6% in June and they were up 18.8% year over year, which is even higher than the 18% annual appreciation reported for May.

Rents are also rising at a feverish pace. Apartment List reported that rents rose 2.1% in August and 13.8% year to date. This is the fastest rent growth on record and is on a 20% pace if these increases continue.

Pending Home Sales Cool In July

Pending Home Sales, which measure signed contracts on existing homes, decreased by 1.8% in July, the National Association of Realtors (NAR) reported. This was slightly worse than expectations looking for a small gain. Contracts were also 8.5% lower on an annual basis.

NAR’s chief economist, Lawrence Yun, said that, “The market may be starting to cool slightly, but at the moment there is not enough supply to match the demand from would-be buyers.” However, he added that “inventory is slowly increasing and home shoppers should begin to see more options in the coming months.”

Also of note, 27% of buyers bypassed appraisal and inspection contingencies in July. This speaks to buyers hoping to accelerate the homebuying process, Yun explained.

What to Look for This Week

After the market closures on Monday in honor of Labor Day, the rest of the week ahead is relatively quiet but there are a few important reports to note.

On Tuesday we’ll get more news about home price appreciation when CoreLogic releases its Home Price Index for July. Thursday brings the latest Jobless Claims figures while on Friday we’ll receive an update on wholesale inflation via August’s Producer Price Index.

Investors will also be monitoring two important auctions ahead, namely the 10-year Note auction on Wednesday and the 30-year Bond auction on Thursday.

Technical Picture

Mortgage Bonds are trading in a range between support at the 100-day Moving Average and overhead resistance at the 50-day. The 10-year is trading near 1.33%, breaking above its 50-day Moving Average. The 200-day is nearby at 1.34% and should keep a lid on yields.

Mortgage Rates Generally Hold Steady

August 26, 2021

The tug-of-war between the economic recovery and rising COVID-19 cases has left mortgage rates moving sideways over the last few weeks. Overall, rates continue to be low, with a window of opportunity for those who did not refinance under three percent. From a homebuyer perspective, purchase application demand is improving, but the major obstacle to higher home sales remains very low inventory for consumers to purchase.

Week of August 23, 2021 in Review

Existing and New Home Sales both beat expectations in July. Consumer inflation also remains hot and Fed Chair Jerome Powell delivered some key remarks.

Sales of existing homes rose 2% from June to July, reaching an annual pace of 5.99 million units. Sales are also up 1.5% when compared to July of last year and are still at strong levels. Inventory is starting to increase, albeit slowly. There were 1.32 million homes for sale at the end of July. While this is up 7% from June, it is still 12% lower than the same time last year.

New Home Sales were also up 1% from June to July. While inventory remains tight, due in part to the cost, supply and labor challenges builders have been facing, it was up 4% from June’s report and 7% from May’s, so certainly a move in the right direction.

Consumer inflation remains red hot, per Personal Consumption Expenditures (PCE), which is the Fed’s favored measure of inflation. On an annual basis, PCE and Core PCE (which strips out volatile food and energy prices) reached the hottest readings in 21 and 20 years, respectively.

Inflation is critical to monitor because rising inflation can have a big impact on Mortgage Bonds and the home loan rates tied to them. See our important explanation about this below.

Initial Jobless Claims did tick slightly higher to 353,000 in the latest week, but the number of people filing for unemployment for the first time still remains near post-pandemic lows. Overall, 12 million people are still receiving benefits throughout all programs, which is up 182,000 from the previous report. Economists and the Fed will be closely watching this data in the coming weeks, when extended benefits expire nationwide in early September.

Also of note, the second reading on second quarter GDP rose slightly to 6.5%, up from 6.4%. While this is a strong number, it is much lower than the initial projections of 9%.

Lastly, Fed Chair Jerome Powell delivered some important remarks at the Fed’s virtual Jackson Hole meeting. Read on for the details.

Existing Home Sales Remain Rock Steady

Existing Home Sales, which measure closings on existing homes, rose 2% from June to July, reaching an annual pace of 5.99 million units. Sales were also up 1.5% when compared to July of last year and are still at strong levels.

Inventory is starting to increase, albeit slowly. There were 1.32 million homes for sale at the end of July. While this is up 7% from June, it is still 12% lower than the same time last year.

The median home price was reported at $359,900, which is 18% higher than July of last year. Though the media might report this otherwise, it’s really important to understand that the median home price is not the same as appreciation. It simply means half the homes sold were above that price and half were below it.

First-time homebuyers accounted for 30% of sales, which is down from 31% in June. Cash buyers remained stable at 23% but this figure is still up big from just 16% last July. Investors purchased 15% of homes, up from 14% in the previous month.

What does this data suggest? Investors may be crowding out first-time homebuyers, as they are likely purchasing lower-priced homes that they can then rent out.

New Home Sales Nudge Higher

New Home Sales, which measure signed contracts on new homes, came in stronger than expectations. Sales rose 1% from June to July, reaching an annualized pace of 708,000. While this amount is down on a year-over-year basis given the spike in sales due to the pandemic last year, it’s not much lower than when sales were at a more normalized level pre-Covid.

Looking at inventory levels, there were 367,000 new homes for sale at the end of July. While this is still very tight, it is up 4% from June’s report and 7% from May, so certainly a move in the right direction.

The median home price was reported at $390,000, which is 18% higher than July of last year. As noted above, the median home price is not the same as appreciation but simply means half the homes sold were above that price and half were below it.

The increase in the median home price speaks to the difficulties builders are having with putting up lower-priced homes. Looking at the mix of sales, there were big increases in the number of sales on the higher end, which dragged the median home price higher.

Fed Talks Inflation and Tapering

Fed Chair Jerome Powell delivered remarks at the Fed’s virtual Jackson Hole meeting. In terms of the Fed’s dual mandate of price stability and maximum employment, he stated that “substantial further progress” has been met for inflation and that there has been clear progress toward maximum employment. 

Powell also maintained his stance that inflation is temporary and found largely in a narrow group of goods and services impacted by the pandemic.

Powell noted that the Fed could begin tapering its ongoing purchases of Mortgage Backed Securities (MBS) and Treasures this year. Referencing the Fed’s July meeting, Powell said, “I was of the view, as were most participants, that if the economy evolved broadly as anticipated, it could be appropriate to start reducing the pace of asset purchases this year.” 

He explained, “The intervening month has brought more progress in the form of a strong employment report for July, but also the further spread of the delta variant. We will be carefully assessing incoming data and the evolving risks.”

Inflation Remains Hot

Speaking of the Fed, their favored measure of inflation, Personal Consumption Expenditures (PCE), showed that headline inflation was up 0.4% in July, which was in line with expectations. However, on an annual basis, the index rose from 4% to 4.2% – the hottest reading in 21 years.

Core PCE, which strips out food and energy prices and is the Fed’s real focus, was up 0.3% in July. Year over year, the reading remained at 3.6% after the higher revision to the previous report, bringing it to the hottest reading in 20 years.

Rising inflation is always important to note since inflation erodes a Bond’s fixed rate of return. In other words, rising inflation can cause Bonds to worsen or lose value. This includes Mortgage Bonds, to which home loan rates are inversely tied. When Mortgage Bonds move lower, be it due to rising inflation or other reasons, home loan rates can move higher.

Though many factors influence the markets, inflation (and whether the rise is in fact transitory as the Fed maintains) remains crucial to monitor in the months ahead.

Initial Jobless Claims Tick Higher

The number of people filing for unemployment benefits for the first time rose slightly to 353,000 in the latest week, but this is still hovering near the post-pandemic low set in the previous report. California (+67K), Illinois (+22K), and Texas (+19K) reported the largest number of claims.

The number of people continuing to receive regular benefits moved marginally lower to 2.86 million while the number of people receiving extended benefits increased by 173,000.

Pandemic Unemployment Assistance Claims (which provide benefits to people who would not usually qualify) and Pandemic Emergency Claims (which extend benefits after regular benefits expire) were up by a combined 53,000.

All told, 12 million people are still receiving benefits throughout all programs, which is up 182,000 from the previous report. This data will be important to monitor in the coming weeks, when extended benefits expire nationwide in early September.

What to Look for This Week

Housing news kicks off the week Monday when Pending Home Sales for July are reported. We’ll also get an update on home price appreciation on Tuesday via June’s Case-Shiller Home Price Index and the Federal Housing Finance Agency (FHFA) House Price Index.

Tuesday also brings an update on regional manufacturing when the Chicago PMI for August is delivered, while the ISM Index will be reported on Wednesday.

Key labor sector reports begin on Wednesday when the ADP Employment Report will give us an update on private payrolls for August. The latest Jobless Claims data will be reported as usual on Thursday, while Friday brings the highly anticipated Bureau of Labor Statistics Jobs Report for August, which includes Non-farm Payrolls and the Unemployment Rate.

Technical Picture

After some initial volatility, Mortgage Bonds moved sharply higher following Fed Chair Jerome Powell’s dovish comments Friday morning. Mortgage Bonds ended the week battling with their 50-day Moving Average and if they’re able to break through, their next ceiling of resistance is at the 101.45 Fibonacci Level. The 10-year broke beneath its 50 and 200-day Moving Averages and has some room until support at the 25-day Moving Average.

Mortgage rates stayed relatively flat this week. Housing is in a similar phase of the economic cycle as many other consumer goods. While there is strong latent demand, low supply has caused prices to rise as shortages restrict the amount of sales activity that otherwise would occur.

July’s Housing Starts reached their weakest level since April, while supply chain bottlenecks continue to impact builders. Initial Jobless Claims hit a post-pandemic low, while Fed chatter about tapering continues.

Housing Starts fell 7% in July, which was well short of expectations. More importantly, starts for single-family homes also dropped 4.5%. Building Permits, which are a good forward-looking indicator of construction, did rise 2.6% overall but permits for single-family homes declined. This lack of Housing Starts and Building Permits is a strong sign that tight supply will continue, which will be supportive of home prices.

Higher construction costs and supply shortages have impacted builder confidence, which fell 5 points to 75 in August per the National Association of Home Builders (NAHB) Housing Market Index. However, it’s important to note that any reading above 50 signals expansion and 75 is still a strong level. In addition, the late summer months are historically a bit slower when it comes to the housing sector due to seasonality issues and families not wanting to move at the start of the school year.

There was good news from the labor sector, as the number of people filing for unemployment benefits for the first time reached a post-pandemic low of 348,000 Initial Jobless Claims in the latest week. The number of continuing and pandemic-related claims also declined. There are now 11.7 million individuals who are still receiving benefits throughout all programs, which is down 312,000 from the previous report.

In other news, Retail Sales disappointed in July, falling by 1.1%, which was lower than the expected 0.2% decrease. Regional manufacturing via the Empire State Index and Philadelphia Fed Index also missed expectations in August, due in part to ongoing supply chain issues. However, last week’s 20-year Bond Auction was in line with expectations.

Lastly, chatter from the Fed continues regarding the timing of tapering their purchases of Mortgage Backed Securities and Treasuries, which have been ongoing to stabilize the markets. Read on for the scoop.

Housing Starts Drop to Weakest Level Since April

Housing Starts, which measure the start of construction on homes, fell 7% in July, which was well short of expectations. More importantly, starts for single-family homes also dropped 4.5%.

Building Permits, which are a good forward-looking indicator of construction, were up 2.6% overall. However, what we really need are permits for single-family homes, and they were down 1.7%.  

Single-family homes authorized but not started were up nearly 1% in July and 56% year over year. This figure remains elevated and it reflects the delays due to supply bottlenecks, higher costs and labor issues.

The bottom line is the lack of Housing Starts and Building Permits means that tight supply will likely continue, which will be supportive of home prices.

On a related note, rents continue to rise per CoreLogic’s Single-Family Rent Index, which showed that rents were up 7.5% year over year in June. This is the fastest increase since 2005. High-priced rentals (which measure 125% or more of the median rent) were up almost 10%. Attached rentals were up 4.6%, while detached rentals (which have more space) were up 10.5%.

And speaking to the demand for homes, Redfin reported that the median days on the market for a home was 15 days in July, up slightly from 14 in June but still extremely strong. In addition, 60% of homes sold in bidding wars, which is still much higher than normal but this has cooled a bit from 66% in June. Redfin noted there was also an increase in supply, as listings increased 4% last month.

Builder Confidence Moves Lower But Still Strong

The National Association of Home Builders (NAHB) Housing Market Index, which measures builder confidence, fell 5 points to 75 in August.

Breaking down the components of the index, current sales conditions fell 5 points to 81, sales expectations for the next six months remained flat at 81, and buyer traffic declined 5 points to 60.

While the readings with the NAHB Housing Market Index have declined in recent months, it’s important to note that any reading above 50 signals expansion and 75 is still a strong level. In addition, the late summer months are historically a bit slower when it comes to the housing sector due to seasonality issues and families not wanting to move at the start of the school year.

Builders are also still dealing with elevated material costs due to supply bottlenecks. While lumber prices have come down, the aggregate residential material costs are up 13% from the beginning of the year. 

NAHB chief economist, Robert Dietz, noted, “While the demographics and interest for home buying remain solid, higher costs and material access issues have resulted in lower levels of home building and even put a hold on some new home sales.” However, he does feel that “production bottlenecks should ease over the coming months and the market should return to more normal conditions.”

Initial Jobless Claims Reach Post-Pandemic Low

The number of people filing for unemployment benefits for the first time fell to 348,000 in the latest week, as Initial Jobless Claims declined by nearly 30,000 from the previous report. California (+68K), Texas (+23K) and Illinois (+18K) reported the largest number of claims.

The number of people continuing to receive regular benefits declined as well, with Continuing Claims dropping by nearly 80,000 to 2.8 million.

Pandemic Unemployment Assistance Claims (which provide benefits to people who would not usually qualify) and Pandemic Emergency Claims (which extend benefits after regular benefits expire) also decreased by roughly 287,000 combined.

All in all, 11.7 million individuals are still receiving benefits throughout all programs, which is down 312,000 from the previous report. These declines seem to reflect the impact of states that have ended the extended benefits, and it’s likely these declines will continue once September comes and the extended benefits expire nationwide.

Taper Talk in Fed Minutes and Upcoming Meeting

The minutes from the Fed’s July 27-28 meeting were released and they showed that most participants judged it would be appropriate to start reducing their purchases of Mortgage Backed Securities (MBS) and Treasures this year if the economy were to evolve broadly as they anticipated. These purchases have been ongoing to help stabilize the markets.

The minutes noted that “substantial further progress” has been made on price stability and is also close to being satisfied on maximum employment. Some Fed members thought tapering should occur in the coming months, while others favored early 2022.

It’s important to keep in mind that these minutes are from the meeting that occurred in late July, before new inflation data and the July Jobs Report were released – and these reports showed continued inflation and robust job growth. Some of the opinions have since changed towards tapering sooner. We have seen some of the most dovish members, including Boston Fed President Eric Rosengren and Minneapolis Fed president Neel Kashkari, support tapering since the July meeting. 

However, one factor that could delay tapering would be the development of the Delta variant’s impact on the economy.

This week’s Fed meeting at Jackson Hole, which begins on Thursday, could offer more clues on the Fed’s tapering timeline. It’s possible the Fed will wait to receive more data in the coming weeks and not announce a decision regarding tapering until their meeting on September 21-22.

Waiting until September will let them analyze another month of inflation data and the August Jobs Report that will be released on September 3. This timing will also let them review how the unemployment figures play out after the Labor Day expiration of extended benefits and how the economy performs in relation to the Delta variant.

Right now, 65% of economists believe the Fed will announce tapering in September.

But remember, they have said many times that they are going to give plenty of advanced notice, meaning that even if they make an announcement in September, the actual tapering of their purchases may not happen until early 2022.

What to Look for This Week

Housing news will once again make headlines, beginning Monday when July’s Existing Home Sales report is released. The data for New Home Sales in July follows Tuesday.

On Wednesday we’ll get an update on Durable Goods Orders for July while Thursday brings the second reading on second quarter GDP and the latest Jobless Claims figures.

Important inflation news ends the week when the Fed’s favorite measure, Personal Consumption Expenditures, is released for July, along with Personal Income and Spending.

And speaking of the Fed, their meeting at Jackson Hole begins on Thursday and the markets will be closely listening for commentary regarding the tapering of their purchases of Mortgage Backed Securities and Treasuries.

Technical Picture

Mortgage Bonds broke beneath support at the 50-day Moving Average as Stocks continued to rally on Friday. However, the 10-year ended last week below its 25-day Moving Average despite testing the level on Friday.

Mortgage Rates Dip

Following last Friday’s strong jobs report, which revealed broad based gains in employment and wage growth, mortgage rates are moving higher. The 30-year fixed-rate mortgage increased by ten basis points week over week. Despite the rise, rates remain very low, particularly given that economic growth is strong and will continue into next year.

Opinions, estimates, forecasts, and other views contained in this document are those of Freddie Mac’s Economic & Housing Research group, do not necessarily represent the views of Freddie Mac or its management, and should not be construed as indicating Freddie Mac’s business prospects or expected results. Although the Economic & Housing Research group attempts to provide reliable, useful information, it does not guarantee that the information or other content in this document is accurate, current or suitable for any particular purpose. All content is subject to change without notice. All content is provided on an “as is” basis, with no warranties of any kind whatsoever. Information from this document may be used with proper attribution. Alteration of this document or its content is strictly prohibited. © 2021 by Freddie Mac.

Weekly Update for week of 8/9/2021

Inflation remains elevated at both the consumer and wholesale levels, while Initial, Continuing and Pandemic Jobless Claims all showed nice declines.

Consumer inflation as measured by the Consumer Price Index (CPI) rose by 0.5% in July while the year over year reading remained at 5.4%, which is still the highest year over year increase in almost 13 years! Core CPI, which strips out volatile food and energy prices, rose 0.3%. Year over year, Core CPI did decrease from 4.5% to 4.3%, though it is coming off the hottest level in 29 years.

Wholesale inflation also moved higher per the Producer Price Index, which rose 1% in July and 7.8% on a year over year basis. The annual reading was up from 7.3% and much hotter than expectations. Core PPI was also hotter on an annual basis than economists had forecasted.

Inflation is critical to monitor because rising inflation can have a big impact on Mortgage Bonds and the home loan rates tied to them. See our important explanation about this below.

Initial Jobless Claims declined by 12,000 in the latest week, as the number of people filing for unemployment for the first time was reported at 375,000. The number of people continuing to receive regular benefits and pandemic-related benefits fell significantly as well. There are now 12 million people receiving benefits throughout all programs, which is a decrease of 920,000 from the previous report. This data does seem to reflect the impact of states that have already ended extended benefits.

On a related note, the JOLTS (Job Openings and Labor Turnover Survey) report showed that job openings were at a record high of 10 million in June while July’s National Federation of Independent Business (NFIB) Small Business Optimism survey showed that optimism moved lower due in part to the new COVID Delta variant, difficulty in filling positions, and higher prices.

However according to the NFIB data, compensation plans, which can help affordability in housing, are near record highs. Businesses have been passing those costs on to the consumer, with sales price expectations just off a 40-year high. This type of inflation may be stickier and not transitory.

The New York Fed also released its Survey of Consumer Expectations for July, showing that inflation expectations were unchanged at 4.8%. Participants also expect home prices to rise by 6% in the upcoming year, while rents are expected to increase by nearly 10%. A key takeaway is that while both rents and home values are increasing, rents can continue to rise each year while a mortgage payment will remain the same unless you have an Adjustable Rate Mortgage. And while taxes and insurance can rise modestly, this is typically miniscule compared to rental increases.

Lastly, investors were closely watching Wednesday’s 10-year Treasury Note Auction and Thursday’s 30-year Bond Auction, which ended up having differing results. Find out more below.

Consumer Inflation Remains Elevated

The Consumer Price Index (CPI), which measures inflation on the consumer level, rose by 0.5% in July, which was in line with expectations. The year over year reading remained at 5.4%, which is still the highest year over year increase in almost 13 years.

Core CPI, which strips out volatile food and energy prices, was up 0.3% though this was slightly lower than the 0.4% increase expected. On a year over year basis, Core CPI decreased from 4.5% to 4.3%, coming off the hottest level in 29 years.

Within the report, rents rose 0.2% in July, increasing by only 1.9% on a year over year basis. However, it’s important to note that the CPI report is not, at least for now, capturing the increases we are seeing in rents that are being reported elsewhere.

For reference, Apartment List showed that rents rose 2.5% in July and are up 11% just from January of this year. Plus, Zumper reported that rents rose 7% year over year in July for a one-bedroom and 9% for a two-bedroom, while single-family rental homes were up nearly 7% as well. We may see some catch up in future months from CPI regarding rents but remember their reporting of this data is dragged down by their methodology.

Rising inflation is always important to note since inflation erodes a Bond’s fixed rate of return. In other words, rising inflation can cause Bonds to worsen or lose value. This includes Mortgage Bonds, to which home loan rates are inversely tied. When Mortgage Bonds move lower, be it due to rising inflation or other reasons, home loan rates can move higher. Though many factors influence the markets, inflation remains crucial to monitor in the months ahead.

Wholesale Inflation Hotter Than Expectations

The Producer Price Index, which measures inflation on the wholesale level, rose 1% in July and 7.8% on a year over year basis. The annual reading was up from 7.3% and much hotter than expectations.

Core PPI, which again strips out volatile food and energy prices, rose 1% in July and 6.2% on a year over year basis. This was also much hotter than expectations and up from the 5.6% annual reading in the previous report.

Though the PPI report is important, it can sometimes be overlooked because it measures wholesale inflation, which isn’t always passed down to consumers. But with the latest numbers coming in so hot, will the Fed be inclined to more quickly taper its purchases of Mortgage Backed Securities and Treasures, which have been ongoing to help stabilize the markets?

Currently, 10 of the Federal Open Market Committee’s 18 members have now come out in favor of tapering, seven of whom are voting members. Whether this translates to actual votes in favor of tapering remains to be seen. We may get more clarity regarding what the Fed thinks about tapering and the timing for it at their Jackson Hole meeting on August 26-28.

Jobless Claims Continue to Decline

The number of people filing for unemployment for the first time fell by 12,000, as Initial Jobless Claims were reported at 375,000 in the latest week. California (+68K), Texas (+30K) and Illinois (+21K) reported the largest number of claims.

The number of people continuing to receive regular benefits was down 114,000, with Continuing Claims totaling 2.87 million and remaining under 3 million for the second week in a row.Pandemic Unemployment Assistance Claims (which provide benefits to people who would not usually qualify) and Pandemic Emergency Claims (which extend benefits after regular benefits expire) also decreased by 730,000 combined. 

All told, 12 million individuals are still receiving benefits throughout all programs. This is a decrease of 920,000 from the previous report. It’s likely these figures will continue to improve once September comes and all of the extended benefits expire.

On a related note, the JOLTS (Job Openings and Labor Turnover Survey) report showed that job openings were at a record high of 10 million in June. Though the JOLTS report is for June while weekly claims are more real-time, it will be important to see if the number of job openings and jobless claims both decline in the coming months and especially come September once all states will be removing extra benefits. This could potentially alleviate some of the compensation pressures noted above that businesses are facing if so.

Auctions Have Mixed Results

Investors were closely watching Wednesday’s 10-year Treasury Note Auction and Thursday’s 30-year Bond Auction to see the level of demand. High demand, which is reflected in the purchasing of Bonds and Treasuries, can push prices higher and yields or rates lower.

Weak demand, on the other hand, can signal that investors think yields will continue to move higher, which can have a negative effect on rates.

Wednesday’s 10-year Treasury Note Auction was met with above average demand. The bid to cover of 2.65 was higher than the one-year average of 2.40. Direct and indirect bidders took 90.3% of the auction compared to 77.5% in the previous 12.

However, Thursday’s 30-year Bond Auction was met with below average demand. The bid to cover of 2.21 was below the one-year average of 2.30. Direct and indirect bidders took 81.7% of the auction compared to 79.6% in the previous 12.

What to Look for This Week

This week’s calendar contains key reports across a wide spectrum of the U.S. economy. We’ll get news regarding regional manufacturing in August, first on Monday with the Empire State Index, followed by the Philadelphia Fed Index on Thursday.

Tuesday brings the latest news on Retail Sales for July, as well as an update on builder confidence in August via the National Association of Home Builders Housing Market Index.

More housing news follows when July’s Housing Starts and Building Permits are reported on Wednesday. Plus, the minutes from the Fed’s July meeting will be released and there will be a 20-year Bond Auction, and both of these have the potential to move the markets.

On Thursday, look for the latest Jobless Claims figures when they are reported, as usual.

Technical Picture

Mortgage Bonds ended the week above their 50-day Moving Average, which will now act as support. The next ceiling is at the 101.45 Fibonacci level. The 10-year ended the week trading at 1.28% after declining sharply Friday. Yields have broken beneath their 200-day Moving Average at 1.30% and are testing their 25-day Moving Average.

Week of August 2, 2021 in Review

July was a strong month for job growth, though private sector payrolls did come in beneath expectations. Reports also showed that home prices continued to heat up in June. Fed chatter also made headlines.

July’s Jobs Report from the Bureau of Labor Statistics (BLS) showed that there were 943,000 new jobs created. This was stronger than expectations of 870,000 new jobs. Plus, positive revisions to data from May and June showed there were an additional 119,000 new jobs in those months combined. The Unemployment Rate also dropped from 5.9% to 5.4%. While this is great news on the surface, it’s important to dig deeper into this data, as explained below.

Private sector job creations were a disappointment in July, however, as the ADP Employment Report showed a gain of 330,000 jobs – less than half of market expectations. Job gains were reported across all sizes of business, with leisure and hospitality jobs once again leading the way, which makes sense as more businesses reopen.

Initial Jobless Claims declined by 14,000 in the latest week, with the number of people filing for unemployment for the first time reported at 385,000. The number of people continuing to receive regular benefits also dipped below 3 million for the first time since the pandemic began, reaching a post-pandemic low of 2.9 million. All told, 13 million individuals are still receiving benefits throughout all programs, which is down 181,000 from the previous week.

Hot home prices also made headlines, as CoreLogic’s latest Home Price Index report showed that home prices rose by 2.3% from May to June. Prices also increased 17.2% year over year, which is up from the 15.4% annual gain reported for May. Meanwhile, rents are also on the rise; don’t miss our important analysis about this.

Last, the Fed chatter continues regarding their purchases of Mortgage Backed Securities and Treasures, which have been ongoing to help stabilize the markets. Read on to see what was said.

Strong Job Creations in July

The Bureau of Labor Statistics (BLS) reported that there were 943,000 jobs created in July, which was stronger than expectations of 870,000 new jobs. In addition, there were positive revisions to May’s and June’s reports, adding 119,000 new jobs in those months combined.

Note that there are two reports within the Jobs Report and there is a fundamental difference between them. The Business Survey is where the headline job number comes from and it’s based predominately on modeling.

The Household Survey, where the Unemployment Rate comes from, is done by actual phone calls to 60,000 homes. The Household Survey also has a job loss or creation component, and it showed there were 1,043,000 job creations, while the labor force increased by 261,000. The number of unemployed people decreased by 782,000, causing the Unemployment Rate to fall by from 5.9% to 5.4%.

But it’s important to look a bit deeper at the Unemployment Rate, as the true Unemployment Rate is actually higher than the headline figure. There is a lingering misclassification error where people were classified absent from work for other reasons and not marked as unemployed on temporary layoff when they should have been. When we factor this into the calculations, the Unemployment Rate should have been around 0.3% higher, totaling 5.7%.

In addition, people who have not looked for work in the last four weeks are also not counted in the labor force or counted as unemployed – and that number totals 6.5 million. When we factor this into the calculations as well, the Unemployment Rate is really closer to 9.2%. When these individuals start looking for work again, they will be counted in the calculations, which could drive the Unemployment Rate higher until they actually find a job. We may see this occur after Labor Day, when the extra unemployment benefits are cut everywhere.

Also of note, wages were on the rise as average hourly earnings were up 0.4% from June to July and they were also up 4% year over year. Average weekly earnings, which we focus on more because it measures what people actually take home, were up 0.4% in July. Year over year weekly earnings are up 4.6%, but if we extrapolate the last few months on a year over year basis, the increase in weekly earnings is closer to 6.5%, which is more indicative of what we are seeing.

Private Payrolls Below Expectations

The ADP Employment Report, which measures private sector payrolls, showed that there were 330,000 jobs created in July, which was less than half of market expectations. Additionally, June’s report was revised lower by 12,000 jobs, bringing the total number of jobs created in June to 680,000.

The services sector led the way in July with 318,000 job creations; leisure and hospitality jobs showed the strongest gains again with 139,000 new jobs. The goods producing sector only increased by 12,000 jobs.

There were job gains across all sizes of businesses. Small businesses (1-49 employees) gained 91,000 jobs, mid-sized businesses (50-499 employees) gained 132,000 jobs, and large businesses (500 or more employees) gained 106,000 jobs.

After losing almost 20 million jobs during the pandemic, we have recovered back almost 13 million. Yet, there are still 7 million unrecovered jobs while there are 9.3 million job openings.

Continuing Jobless Claims Fall Below 3 Million

The number of people filing for unemployment for the first time declined by 14,000 in the latest week, as Initial Jobless Claims were reported at 385,000. California (+65K), Texas (+29K) and Pennsylvania (+19K) reported the largest number of claims.

The number of people continuing to receive regular benefits was down 366,000 as Continuing Claims were reported at 2.9 million. This is the first dip below 3 million since the pandemic began, and it is also a post-pandemic low.

Pandemic Unemployment Assistance Claims (which provide benefits to people who would not usually qualify) and Pandemic Emergency Claims (which extend benefits after regular benefits expire) also decreased by 92,000 combined.

As of this latest report, 13 million individuals are still receiving benefits throughout all programs, which is down 181,000 from the previous report. It’s likely that all of the figures within this report will improve once September comes and all of the extended benefits expire.

Home Prices Heating Up

CoreLogic released their Home Price Index report for June, showing that home prices rose by 2.3% from May. Prices also increased 17.2% year over year, which is up from the 15.4% annual gain reported for May.

Within the report, the hottest markets once again were Phoenix (+27%), San Diego (+22%) and Denver (+18%).

CoreLogic forecasts that home prices will rise 0.7% in July and 3.2% in the year going forward. But remember in June, they only anticipated an 0.8% monthly increase and prices ended up rising 2.3%. On an annual basis, they are forecasting that prices will rise 3.2%, which is lower than their 3.4% annual forecast from May’s report and lower than most forecasts out there.  

While higher home prices and low inventory are challenges for homebuyers, the alternatives aren’t favorable, either.

The Apartment List National Rent Report for July showed a 2.5% increase in rental prices from June. Prices are up by 10.3% compared to July of last year and they’re also 9.4% higher compared to pre-pandemic levels from March 2020. In addition, cities that lagged like San Francisco and New York are seeing sharp snap backs. Other cities continue to have rapid rental gains led by Boise, Idaho, where rents are up 39% since the start of the pandemic.

The bottom line is rents are rising almost at the pace of home prices and rents can continue to go up each year. With a home purchase, unless you have an adjustable rate mortgage, your payment will remain the same. Of course, taxes and insurance can rise modestly, but this is miniscule compared to rental increases. Additionally, remember that part of a mortgage payment is your own money in principal.

Fed Chatter Makes Headlines

Fed Governor and possible next Fed Chair, Lael Brainard, commented on when she believes the Fed should begin tapering their purchases of Mortgage Backed Securities and Treasuries, which have been ongoing to help stabilize the markets. Brainard said that she expects to be more confident in assessing progress once the September data is in hand, when consumption, school, and work patterns settle into a post-pandemic normal. She agrees with Fed Chair Jerome Powell in saying that employment has some distance to go.

Because the data is always delayed a month, her statements mean she would not feel confident in assessing progress until October, with the closest Fed meeting being November 2-3. And since the Fed said that they will give plenty of advanced warning before actually tapering, it’s possible they may announce their plans at their November meeting but not actually begin tapering until early 2022.

Fed Governor and voting member, Chris Waller, was also in the news with a differing opinion than many other Fed members. He stated he would be ready to start tapering sooner, in October if he sees strong job growth for July and August. He thinks if we see 2 million job creations over those two reports, this would fulfill the “substantial progress” the Fed is looking for in the labor market.

What to Look for This Week

Inflation data headlines this week’s economic calendar, with July’s Consumer Price Index releasing on Wednesday while the Producer Price Index (which measures wholesale inflation) will be reported on Thursday.

Also of note, Tuesday brings an update on how small business owners are feeling with the National Federation of Independent Business Small Business Optimism Index for July. On Thursday, the latest Jobless Claims figures will be reported as usual.

Investors will also be watching two important auctions closely, first on Wednesday with the 10-year Note auction followed by Thursday’s 30-year Bond auction

Technical Picture

After the stronger than expected BLS Jobs Report on Friday, Mortgage Bonds broke beneath both their 25-day Moving Average and the 101.45 Fibonacci level. Mortgage Bonds ended last week in a range between the aforementioned Fibonacci level and support at their 50-day Moving Average. The 10-year is trading at around 1.30% after breaking above the triple ceiling at 1.29%.

U.S. weekly averages as of 7/22/2021

Week of July 19, 2021 in Review

Sales of existing homes moved higher in June, thanks in part to some improvement in inventory. Construction data was mixed, however, though the demand for homes has helped builders stay confident despite supply, cost and labor concerns.

Existing Home Sales increased 1.4% from May to June. While inventory remains a huge challenge for buyers, we are seeing some improvement with 1.25 million homes for sale, which is up 3.3% from May (and this also follows a 7% increase in the previous report). The median home price was up 23.4% year over year, coming in at a record high $363,300. However, it’s crucial to understand that this is not the same as appreciation, as explained below.

There was also an update on new home construction, though this gave us some mixed news. Housing Starts, which measure the start of construction on homes, were up 6.3% in June overall and, more importantly, so were starts for single-family homes. However,

Building Permits, which are a good forward-looking indicator, declined in June. Homes authorized but not started are up almost 60% year over year and this figure continues to climb, which reflects the delays we’ve seen due to higher costs and labor issues.

These supply, cost and labor issues were part of the reason builder confidence ticked down a notch this month. The National Association of Home Builders Housing Market Index, which is a near real-time read on builder confidence, fell one point to 80 in July. However, any reading over 50 indicates that more builders see conditions as good versus poor, so July’s reading still reflects a strong level of confidence and was helped by the high demand for homes that remains across the country.

Initial Jobless Claims did move higher in the latest week, as the number of people filing for unemployment benefits for the first time rose by 51,000 to 419,000. However, the number of people continuing to receive regular benefits decreased to a post-pandemic low, while the number of people receiving pandemic-related benefits also fell by 1.1 million. These declines seem to reflect the impact of states that have already ended

extended benefits ahead of the Labor Day expiration.

And of note, last week’s 20-year Bond Auction was met with average demand. The bid to cover of 2.33 was just under the 12-month average of 2.35. Direct and indirect bidders took 79.1% of the auction compared to 76.6% in the previous 12.

Lastly, you may have heard recent talk in the media about a housing bubble. Don’t miss our important analysis about this below.

What the Median Price of Existing Home Sales Means

Existing Home Sales, which measure closings on existing homes, rose 1.4% from May to June. On an annual basis, they were up 23% compared to June of 2020, which makes sense given the pandemic-related shutdowns last year.

Inventory still remains a huge challenge for buyers, though we did see an improvement. There were 1.25 million homes for sale, which is up 3.3% from May and this also follows a 7% increase in the previous report. While inventory is still down 19% year over year, it is getting a bit better.

The median home price was reported at a record high $363,300, which is up 23.4% year over year. Though the media might report this otherwise, it’s really important to understand that the median home price is not the same as appreciation. It simply means half the homes sold were above that price and half were below it, and the rise is due to the amount of higher-end homes that are selling. Sales of homes beneath $250,000 were down 15%, while sales of homes over $1 million were up 150%. Real appreciation is around 14%, and while this is still a high number, it is significantly less than the 23.4% rise in the median home price.

First-time homebuyers have accounted for at least 31% of sales over the last 5 months. While affordability is certainly a bit tougher with higher home prices, rates are still very attractive and first-time home buyers are clearly hanging in there.

Meanwhile, cash buyers remained stable at 23%, though this number is up 16% from last year. Investors purchased 14% of homes, down from 17% from May.

Deconstructing Housing Starts Data

Housing Starts, which measure the start of construction on homes, were up 6.3% in June and 29% year over year. However, there was a negative revision to May’s figures and when taking this into account, the gain in June is really 4.5%. Starts for single-family homes, which are in such demand from buyers, were also up 6.3%.

While the increase in Housing Starts is a good sign, the decrease in Building Permits (which are a good forward-looking indicator) is concerning. Permits were down 5.1% from May to June, but they are 23% higher year over year. Permits for single-family homes also fell, unfortunately, dropping 6.3%.

Homes authorized but not started are up almost 60% year over year and this figure continues to climb, which shows us there are delays due to higher costs and labor issues. Single-family units completed are down 6% from May to June and 3% year over year. This speaks to the fact that builders can’t get appliances, which is another factor that’s delaying the completion process.

Overall, this was a mixed report. While higher Housing Starts in June will eventually lead to a little more supply once these homes are completed, looking beyond this, Permits are lower and supply constraints appear that they will be in place for quite some time. This should continue to be supportive of home price appreciation.

Builder Confidence Ticks Lower But Still Strong

Builder confidence moved lower in July, as the National Association of Home Builders Housing Market Index fell one point to 80. While this index has been declining, a reading above 50 signals expansion and 80 is still a very strong level. The month of July is typically slower due to seasonality and there was also a heatwave that may have deterred some traffic.

Of the three components of the index, current sales conditions fell one point to 86, sales expectations for the next six months rose two points to 81, and buyer traffic dropped six points to 65.

The high demand for homes helped offset some of the challenges builders are facing, as NAHB Chairman Chuck Fowke noted that, “Builders continue to grapple with elevated building material prices and supply shortages.”

The Housing Bubble Debate

Given how hot the housing market has been, you may have heard talk of a housing bubble in the media. Let’s break this down and analyze what causes a housing bubble.

In typical bubble-like conditions, like we saw during the last housing bubble, there is a decline in demand and a large amount of supply. Back in 2007, there were roughly 3.7 million homes for sale and not enough demand to sop up that supply.

If we fast forward to today, we have some of the tightest inventory ever, with only 1.2 million homes for sale. Additionally, demand is extremely strong and increasing due to demographics. When we look at supply and demand now compared to 2007, there are 12 million more households (demand) and 2.5 million fewer homes.

In fact, because there is so much demand and such a backlog, the country’s largest homebuilder, D.R. Horton, is pulling back on order activity to allow housing’s strained supply chain an opportunity to catch up with demand. In other words, there is so much demand that they have to purposely slow down building, as they don’t have enough supply of materials, labor and appliances.

While the pace of appreciation has been hot, and this may slow in the coming months, there is a big difference between slower home price growth and declines in prices. Plus, even though buying a home can be challenging right now, renting comes with its own challenges, including rising rental prices across the country. That’s why it’s so important to understand the current market dynamics when it comes to talk of a housing bubble.

Initial Jobless Claims Rise Yet Evidence of Improvement

Initial Jobless Claims moved in the wrong direction in the latest week, as the number of people filing for unemployment benefits for the first time increased 51,000 to 419,000. California (+58K), Texas (+44K) and Pennsylvania (+38K) reported the largest number of claims.

However, the number of people continuing to receive regular benefits decreased 29,000 to 3.2 million, which is a post-pandemic low.

Pandemic Unemployment Assistance Claims (which provide benefits to people who would not usually qualify) and Pandemic Emergency Claims (which extend benefits after regular benefits expire) fell by 1.1 million combined, which is a significant improvement.

There are currently 12.6 million people still receiving benefits throughout all programs, which is down 1.3 million from the previous week. We have seen this number decline by roughly 2 million over the past three weeks. While this data is lagging due to the time it takes people to find employment, and then for the reporting to occur, it does appear that we are seeing the impact from some of the states that have cut extra benefits ahead of the Labor Day expiration.

What to Look for This Week

Housing news continues in this week ahead, beginning Monday with June’s New Home Sales. Tuesday brings an update on home appreciation via May’s Case-Shiller Home Price Index and the Federal Housing Finance Agency House Price Index, while Pending Home Sales for June follow on Thursday.

Also on Thursday, the latest weekly Jobless Claims figures will be reported along with second quarter Gross Domestic Product.

On Friday, critical inflation data will be delivered via the Fed’s favored measure of inflation, Personal Consumption Expenditures, along with Personal Income and Spending for June.

Plus, the Fed’s two-day meeting of the Federal Open Market Committee begins Tuesday, with the Monetary Policy Statement following on Wednesday, and this always has the potential to move the markets.

Technical Picture

Mortgage Bonds are trading in a wide range between support at 101.453, which has held the last several times tested, and overhead resistance at the 200-day Moving Average. The 10-year is testing an important ceiling at 1.29%. If yields break above this level, they will likely move towards 1.37%, which can cause Mortgage Bond prices to move lower.