Mortgage Rates Remain Relatively Flat

June 11, 2020

The rebound in homebuyer demand continued this week, driven by mortgage rates that hover near record lows. This turnaround in demand, particularly by those who have higher incomes than the typical household, also reflects deferred sales from the Spring.

Week of June 8th, 2020 in Review

Unemployment remains a sobering reality for millions of people across the country, as another 1.5 million people filed claims for the first time during the week ending June 6. While this was a decline from the previous week, it does point to a staggering 16.7% unemployment rate, when considering the number of new claims, continuing claims and the amount of people in the labor force.

The Fed held their regularly scheduled Federal Open Market Committee meeting and as expected kept the benchmark Fed Funds Rate at zero. The Fed noted that they expect very little inflation this year, which is typically a good sign for home loan rates, but they also had some sobering forecasts for GDP and unemployment, as noted below.

Right on cue, the Consumer and Producer Price Indexes for May confirmed inflation remains tame due to the lack of pricing pressure.

According to the Bureau of Economic Research, the US economy was already declining and we were already in a recession towards the end of February, before the pandemic began. While COVID-19 has accelerated the decline, this could also hopefully mean we will come out of this downturn faster as well.

Lastly, on a positive note, small businesses were feeling more optimistic about the future in May, per the National Federation of Independent Business small business optimism index, which increased from 90.9 to 94.4. Plans to hire, capital spending and plans to increase inventory all rose, as did those who expect a better economy and higher sales. NFIB’s Chief Economist Bill Dunkelberg said, “It’s still uncertain when consumers will feel comfortable returning to small businesses and begin spending again, but owners are taking the necessary precautions to reopen safely.”

Initial Jobless Claims Remain in the Millions

Another 1.5 million individuals filed for unemployment benefits for the first time during the week ending June 6, which was in line with estimates. California (+258K), Georgia (+134K) and Florida (+110K) once again posted the largest gains.

Continuing claims, which measure people continuing to receive benefits, decreased by 339,000 to 20.9 million. This figure is backwards looking, so when we add the following two weeks of initial claims, there are now roughly 25 million individuals receiving benefits.

When we factor in the number of new claims, continuing claims and the amount of people in the labor force, we estimate there to be a 16.7% unemployment rate currently. This figure is close to the Bureau of Labor Statistics number that was reported in the May Jobs report released on June 5 when taking the misclassification into account. Remember that the BLS unemployment rate was reported at 13.3%. However, without the misclassification error, they said that the unemployment rate would have been 3% higher, or 16.3%.

In addition, when we try to estimate how many new jobs the Paycheck Protection Program has temporarily created, we think that the unemployment rate could be closer to 20% without it.

The Fed Sings a Sobering Tune

Fed members held their two-day Federal Open Market Committee meeting Tuesday and Wednesday and left the benchmark Fed Funds Rate unchanged at zero. The Fed also said that they expect the Fed Funds Rate to remain at zero through 2022, with Fed Chairman Jerome Powell saying, “We’re not even thinking about raising rates.”

The Fed also noted that they will continue to purchase Mortgage Backed Securities and Treasuries at current levels, meaning they don’t plan to taper those purchases any further.

However, the Fed’s forecasts were a bit eye-opening and led to a sell-off in stocks on Thursday. They projected a decline of 6.5% in GDP this year, followed by a 5% gain in 2021 and 3.5% gain in 2022. Note that if GDP does drop as predicted in 2020, we really need to see an 8% gain to make it all back.

The Fed’s unemployment rate forecasts were also somber, calling for 10% in 2020, 7% in 2021 and 5% in 2022 … meaning that unemployment may stick around longer than many expect.

Lastly, the Fed predicts there to be no inflation in 2020, around 1.5% in 2021 and less than 2% in 2022. While this points to a slow economy, it is a good sign for lower home loan rates because inflation reduces the value of fixed investments. This includes the Mortgage Bonds to which home loan rates are tied.

Speaking of Inflation

Inflation on the consumer level came in at -0.1% in the month of May per the Consumer Price Index while the year over year reading decreased from 0.3% to 0.1%. Core inflation, which strips out food and energy prices, dropped by 0.1% from April to May and from 1.4% to 1.2% when compared to May of last year. Again, this data speaks to a soft economy with no pricing pressure.

Within the report, it’s interesting to note that rents of a primary residence dropped from 3.7% to 3.5%, showing that there is less demand and a lack of pricing pressure for rents. This makes sense with people moving out of city living and into the suburbs, which data in the HousingWire survey noted below also confirms.

Meanwhile, the Producer Price Index (PPI), which measures wholesale inflation, was up 0.4% in May, higher than the expected 0.1% estimate. On an annual basis, PPI came in at -0.8%, which was better than the expected -1.1% loss. The 12-month reading in negative territory again speaks to the lack of inflation we’ve been seeing. Core PPI, which strips out food and energy prices, did decrease by 0.1% from April to May and from 0.6% to 0.3% annually, which was in line with estimates.

Of Note in Housing…

CoreLogic’s Home Equity Report for the first quarter of 2020 shows that homeowners gained 6.5% in equity the past year. What’s more, the average homeowner has gained $106,000 since the first quarter of 2010. Negative equity has also significantly improved, down from 26% in 2010 to 3% in 2020.

In addition, a HousingWire article showed that 26.1% of renters surveyed with leases expiring in the next six months said they are likely to renew their lease, 35.9% are likely not to renew and 38% are somewhat likely or not sure at the moment.

Renters who pay more than $1,750 a month are the least likely to renew at just 18.7%, while 41.6% said they are not likely to renew. This data speaks to the shift from city life to the suburbs that people are considering, and it may continue to fuel demand for housing.

Family Hack of the Week

This year, Father’s Day is June 21. While the types of celebrations that are possible may vary widely around the country with differing stages of stay at home orders in place, these ideas from Good Housekeeping can make for a perfect celebration anywhere.

Start the day off right by cooking a hearty brunch for dad with all his favorites. And you can never go wrong with baking your dad’s favorite dessert for later in the day.

Plan a family game or movie night where everyone steps away from their phones and screens and enjoys fun time together. Drive-in movies have also become popular in many cities and can provide a fun and safe night out.

If your dad loves to learn new things, consider signing him up for an online class. Many universities offer free or low-cost classes or consider sites like MasterClass that provide classes from some of the most successful people in sports, writing, the arts and more.

For the travel-loving dad, consider a day of virtual “travel” via free online tours of museums and other famous sites all around the world.

Lastly, if your dad is missing his favorite sports team, many past games are available to stream. Create a marathon of winning games from his favorite teams that he can enjoy.

What to Look for This Week

This week brings a look at data across a wide spectrum of the economy. In the housing sector, the National Association of Home Builders Housing Market Index for June releases Tuesday, followed by May’s Housing Starts and Building Permits Wednesday. Tuesday also brings Retail Sales data for May. We’ll get an update on manufacturing in the New York region with the Empire State Index for June on Monday, followed by the Philadelphia Fed Index on Thursday. Last, but certainly not least, the latest weekly Initial Jobless Claims remains critical to monitor when it releases as usual on Thursday.

Technical Picture

The Fed’s ongoing purchases of Mortgage Backed Securities continue to stabilize the markets and, as noted above, they are planning to continue these purchases at current levels. Mortgage Bonds were able to shift direction and rebound last week, breaking above both their 25-day and 50-day Moving Averages. They ended the week trading just support at the 50-day Moving Average.