Mortgage Rates Move Up, What’s Coming Next?

Photo by Steve Halama on Unsplash

August 17, 2020

Even with the presidential election less than three months away, no one really knows what’s on the horizon and how things will change after November 3rd. What we do know today is that with access to very cheap money in the form of historically low interest rates, Homebuyer demand remains strong here in the San Francisco Bay Area. This is especially true for those in search of an entry-level home. The improvement in affordability due to these historically low mortgage rates is significant for those buyers. In fact, for some buying is cheaper than renting. That’s a big change from just a year ago. So, even with this week’s uptick, very low rates are providing a boost to the housing market and despite low inventory, the market continues to hold up well during this time of uncertainty. In short, IT’S A GREAT TIME TO BUY A HOME! Want to get started learning more about buying a home? Call me. I can help.

Week of August 10th, 2020 in Review

Initial Jobless Claims were under 1 million for the first time since mid-March, as the week ending August 8 saw another 963,000 people file for unemployment benefits for the first time. The number of people continuing to receive benefits also decreased. While these improvements are certainly a step in the right direction, there could be a caveat to them as highlighted below.

Inflation grew hotter in July at both the consumer and wholesale levels. The Producer Price Index (PPI), which measures wholesale inflation, and the Consumer Price Index (CPI) both increased 0.6% from June to July – with PPI’s reading more than double what forecasters had predicted. The Core readings, which strip out volatile food and energy prices, also increased on both a monthly and annual basis. Despite the increases, inflation remains tame overall.

Retail Sales were also on the rise, up 1.2% from June to July. Removing automobiles, sales were up 1.9%. June’s sales figures were also revised a bit higher as well. Overall, the report was stronger than expected but it will be important to see how the reduced additional unemployment benefits impacts retail sales going forward.

The National Federation of Independent Business released its Small Business Optimism Index, which fell 1.8 points to 98.8 in July. Of note, reports of expected better business conditions in the next six months declined 14 points to a net 25%. NFIB’s Chief Economist Bill Dunkelberg said, “This summer has been challenging for many small business owners who are working hard to keep their doors open and remain in business.” He also added that, “Small business represents nearly half of the GDP and this month we saw a dip in optimism. There is still plenty of work to be done to get businesses back to pre-crisis numbers.”

Redfin released a survey showing that 56% of single-family homes for sale faced competition, followed by 54% of townhomes and 42% of condos. This reflects the tight inventory noted in recent New and Existing Home Sales reports.

Lastly, the Federal Housing Finance Agency made headlines, announcing a new fee. Find out more about what this means below.

Initial Jobless Claims Fall Below 1 Million

Another 963,000 people filed for unemployment benefits for the first time during the week ending August 8. This was 228,000 claims less than the previous week and the first reading under 1 million since mid-March. Continuing claims, which count people who continue to receive benefits, improved by 604,000 to 15.5 million. California (+213K), New York (+52K) and Texas (+51K) reported the largest gains.

First-time Pandemic Unemployment Assistance (PUA) Claims totaled 488,000 in the latest week. These claims are not captured in the headline figure and they represent people like gig workers and contractors who usually would not be approved for unemployment benefits. Continuing PUA Claims improved by 2.2 million to 10.7 million people continuing to receive benefits.

All in all, the total number of people receiving some type of benefits is around 28.2 million, which is an improvement of about 3 million. Note that this figure is delayed 3 weeks and given the improvement we’ve seen, the unemployment rate is likely

around 15% based on our calculations.

However, there is something important to keep in mind when looking at this data. While the improvement in jobless claims appears great on the surface, remember that the additional $600 in unemployment benefits expired recently. While we certainly hope that the decreasing number of unemployment claims is a result of people finding work, it is possible that some of the improvement is from people who are incented to return to work due to the expiration of additional benefits. We will certainly gain more clarity in the weeks to come.

Inflation Hotter Than Expected … But Still Tame

The Producer Price Index (PPI), which measures inflation at the wholesale level, increased 0.6% from June to July. This monthly increase was double what forecasters expected. On an annual basis, PPI increased from -0.8% to -0.4%. Core PPI, which strips out volatile food and energy prices, was up 0.5% in July and increased from 0.1% to 0.3% year over year.

July’s Consumer Price Index (CPI) came in at 0.6%, matching the increase seen in June. On an annual basis, consumer prices increased from 0.6% to 1%, which is a level that reflects inflation remaining in check. Higher gas prices certainly contributed to the monthly increase in consumer inflation, but they are still lower when compared to last year, weighing on the annual figure.

Core CPI, which also strips out food and energy prices, increased by 0.6% from June to July, while rising from 1.2% to 1.6% when compared to July of last year. Of note within the reports, rents have risen 3.1% across the country while the medical care index rose 5% over the last year.

The bottom line is that inflation remains well below the Federal Reserve’s 2% target, and the pandemic will likely keep it low in the immediate months ahead.

The Latest From the Federal Housing Finance Agency

The FHFA announced that they would be assessing a 0.5% fee on refinances for loans sold to Fannie Mae and Freddie Mac after September 1. Their stated reasoning was, “In light of market and economic uncertainty resulting in higher risk and costs incurred by Fannie Mae, we are implementing a new loan-level price adjustment.”

This is a fee that will ultimately impact consumers who are refinancing as noted above, though it will not impact purchase loans – at least for the time being.

What to Look for This Week

Housing reports highlight this week’s busy economic calendar, starting on Monday with August’s National Association of Home Builders Housing Market Index, which gives us a real-time read on builder confidence. Tuesday brings Housing Starts and Building Permits for July, while Friday will give us an update on July’s Existing Home Sales.

There will also be an update from the manufacturing sector on Monday with August’s Empire State Index, which reflects manufacturing activity in the New York region. August’s Philadelphia Fed Index follows on Thursday.

The minutes from the Fed’s meeting in late July will be released on Wednesday.

And finally, the latest Initial Jobless Claims figures remain critical to monitor when they are released as usual on Thursday.

Technical Picture

The Fed’s ongoing purchases of Mortgage Backed Securities continues to stabilize the markets. After falling from recent highs, Mortgage Bonds are trading in a wide range between support at 102.765, which is the low from August 12, and overhead resistance at the 25-day Moving Average.

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