Weekly Update – 7/14/2020
Mortgage Rates Hit Another All-Time Record Low – Primary Mortgage Market Survey as of July 9, 2020
The summer is heating up as record low mortgage rates continue to spur homebuyer demand. However, it remains to be seen whether the demand will continue if COVID cases rise to the point that it hinders economic growth.
Week of July 6th, 2020 in Review
After some big labor market reports were released on July 2 and the fireworks of July 4, last week was relatively quiet on the economic report front.
Weekly initial jobless claims were once again released on Thursday, and though they beat expectations, they remain in the millions. Another 1.314 million people filed for unemployment benefits for the first time during the week ending July 4. A positive sign in the report is that continuing claims, which measure people continuing to receive benefits, did improve pretty significantly after being persistent for many weeks.
CoreLogic also released home appreciation figures for May, showing that prices rose 0.7% from April to May and 4.8% when compared to May of last year. However, CoreLogic has revised their annual forecast for the year moving forward, as detailed below.
Lastly, inflation continues to remain tame. At the wholesale level, the Producer Price Index was down 0.2% in June after rebounding in May, coming in much lower than expectations. The lack of wholesale inflation will certainly not lead to consumer inflation – and it’s one of the reasons Mortgage Bonds have moved higher and home loan rates have moved lower of late.
Initial Jobless Claims Beat Expectations
The latest weekly initial jobless claims showed that another 1.314 million people filed for unemployment benefits for the first time during the week ending July 4. This was slightly better than expectations of 1.4 million claims. California (+267K), Texas (+117K) and Georgia (+103K) reported the largest gains.
Continuing claims finally saw a big improvement, falling from 18.76 million to 18.06 million, which is the first meaningful improvement we have seen since in quite some time.
If we factor in the amount of new and continuing claims and the number of people in the labor force, we estimate that the real-time unemployment rate is around 14%. This rate would be about 3% higher, or 17%, without the estimated number of temporary new jobs created by the Paycheck Protection Program.
The Latest Home Appreciation Forecasts
CoreLogic’s Home Price Index Appreciation report for May showed that home prices rose 0.7% from April to May. Home prices were also up 4.8% when compared to May of last year. This is a decline from the year-over-year reading of 5.4% appreciation in April’s report. Washington (5.0%), San Diego (4.9%) and Las Vegas (4.8%) led the gains.
CoreLogic forecasts that home prices will drop 0.1% from May to June, and they expect prices to fall 6.6% from May 2020 to May 2021. Their annual forecast dropped significantly from their previous prediction of a 1.3% decline.
Dr. Frank Nothaft, Chief Economist for CoreLogic, said, “Pending sales and home-purchase loan applications are higher than in June of last year and reflect the buying activity of millennials. By the end of summer, buying will slacken and we expect home prices will show declines in metro areas that have been especially hard hit by the recession.”
CoreLogic also noted that a lot of the demand was pent up from spring to summer with elevated unemployment, and that purchase activity and home prices could fall off once summer ends.
It remains to be seen if this latest forecast will prove true, or if the surge in sales and appreciation levels off less steeply, which could still allow for home price gains over the next year.
Wholesale Inflation Lower Than Expected
The Producer Price Index, which measures inflation on the wholesale level, was down 0.2% in June after rebounding in May. The reading was much lower than expectations of a 0.4% rise. PPI also declined 0.8% on an annual basis, which was unchanged from May’s annual reading.
The core rate, which strips out volatile food and energy prices, was down 0.3% from May to June, which was also much lower than expectations of a 0.2% gain. Year over year, core PPI was up 0.1%.
The bottom line is that the ongoing pandemic continues to depress demand. There is no wholesale inflation, which will certainly not result in consumer inflation. This is one of the reasons we have seen Mortgage Bonds on such a nice move higher.
Remember, inflation reduces the value of fixed investments like Mortgage Bonds. And since home loan rates are tied to Mortgage Bonds, when Bonds improve, home loan rates can as well.
What to Look for This Week
There’s a full slate of economic reports ahead this week across a wide range of sectors. Tuesday brings the National Federation of Independent Business Small Business Optimism Index for June and more inflation news, this time on the consumer front with June’s Consumer Price Index.
There will be an update from the manufacturing sector with July’s Empire State Index (which focuses on the New York region) on Wednesday, followed by July’s Philadelphia Fed Index on Thursday.
Thursday also brings the latest weekly jobless claims numbers, an update on Retail Sales for June and the National Association of Home Builders Housing Market Index for July, which will give us a real-time read on builder confidence.
More housing news ends the week on Friday, with June’s Housing Starts and Building Permits report. Plus, we’ll get the latest read on how consumers are feeling with July’s Consumer Sentiment Index.
The Fed continues to stabilize the markets with its ongoing purchases of Mortgage Backed Securities. Mortgage Bonds rallied more than 70bp since July 1st but are now backing off a strong ceiling of resistance at 104.625.