Mortgage Rates Drop Below Three Percent
May 27, 2021
Mortgage rates for purchases were down below three percent last week but they are on their way up again, continuing the seesaw that we’ve had for a few weeks now and even though refinance rates are slightly higher, many homeowners can benefit from refinancing and increase their monthly cash flow. In fact, homeowners who refinanced their 30-year fixed-rate mortgage in 2020 saved more than $2,800 dollars annually. Substantial opportunity for cash flow savings continues to exist today, as nearly $2 trillion in conforming mortgages have the ability to refinance and reduce their interest rate by at least half a percentage point. Oh yeah, AND IT’S STILL A GREAT TIME TO BUY A HOME. If you are looking to purchase, the easiest way to be competitive in this market is to get pre-approved! We are offering fully underwritten pre-approvals for our clients. Contact me today for a free consultation. Christian Carr, 650-207-4364, NMLS 1466899
Week of May 24, 2021 in Review
Consumer inflation and home prices are on the rise, while low inventory continues to impact homebuyers. Plus, there was good news from the labor sector, as Initial Jobless Claims reach their lowest level since the pandemic began.
The Fed’s favored measure of inflation, Personal Consumption Expenditures (PCE), showed that headline inflation was up 0.6% in April, while year over year PCE increased from 2.4% to 3.6% – the hottest reading in 13 years! Core PCE, which strips out volatile food and energy prices and is the Fed’s real focus, was also on the rise. Read on to find out why rising inflation is so important to monitor when it comes to Mortgage Bonds and the home loan rates tied to them.
High demand and low inventory continue to impact home sales, as sales of new homes fell nearly 6% from March to April, with just a 4.4 months’ supply of new homes available for sale at the end of April. Meanwhile, Pending Home Sales, which measure signed contracts on existing homes, also declined 4.4% in April. Once again, this was due to a lack of inventory as demand for existing homes remains high around the country.
This dynamic of high demand and low inventory has also helped home prices continue to appreciate. Home prices rose 13.2% year over year in March, per the Case-Shiller Home Price Index. This is a 15-year high and even stronger than the 12% annual appreciation in the previous report. The Federal Housing Finance Agency (FHFA), which measures home price appreciation on single-family homes with conforming loan amounts, also came in strong, with home prices up 1.4% from February to March and 13.9% year over year.
Over in the labor sector, Initial Jobless Claims fell 38,000 as another 406,000 people filed for unemployment benefits for the first time in the latest week. All told, 15.8 million people are still receiving benefits throughout all programs, which is a decline of 175,000 from the previous week. Upcoming reports in June should allow us to evaluate the impact of states that are no longer participating in the extended benefits program.
The second reading on first quarter GDP came in at 6.4%, which was just slightly below estimates and unchanged from the advanced reading. It makes sense that we are seeing a high level of GDP after the recent stimulus package.
Lastly, Thursday’s 7-Year Note Auction was met with above average demand. The bid to cover of 2.41 was above the one-year average of 2.35. Direct and indirect bidders took 80.3% of the auction, compared to 77.2% in the previous 12.
Inflation Hits Hottest Reading in 13 Years
The Fed’s favored measure of inflation, Personal Consumption Expenditures (PCE), showed that headline inflation was up 0.6% in April, which was in line with estimates. Year over year the index increased from 2.4% to 3.6%, which is the hottest reading in 13 years!
Core PCE, which strips out volatile food and energy prices and is the Fed’s real focus, was up 0.7%, which was higher than the consensus of a 0.6% increase. Year over year, Core PCE increased from 1.9% to 3.1%.
Part of the reason for the increase in the annual comparisons is that readings for the more current months are replacing the readings from 2020 when much of the economy was shut down due to the pandemic.
Even though the increase in inflation has been expected this spring, rising inflation is still important to monitor because inflation reduces the value of fixed investments. This includes Mortgage Bonds, to which home loan rates are inversely tied. In other words, rising inflation can cause Mortgage Bonds to worsen or move lower and home loan rates to rise.
Though many factors impact the markets, inflation data is especially crucial to monitor because of this dynamic, and I will be keeping a close eye on May’s inflation numbers when they are reported in June. For example, if May shows just a 0.4% reading, it will replace a 0.1% reading from May of last year, and cause year over year Core PCE to reach roughly 3.4%!
Also of note within the report, Personal Income fell 13% in April after jumping 21% in March, which was right after the latest stimulus checks were dispersed. Personal Spending started to level off in April, ticking up 0.5% after rising 4.7% in March. The savings rate declined to 14.9% after jumping 28% in March. These figures all make sense, as many people both spent and saved more in March after they received the stimulus payments.
New and Pending Home Sales Drop in April
New Home Sales, which measure signed contracts on new homes, were down nearly 6% in April. However, this comes after a nice bounce higher in March, so if we smooth out the numbers, sales in April were up about 1% from February.
Looking at inventory levels, there were only 316,000 new homes for sale at the end of April, which represents a 4.4 months’ supply of homes.
The median home price was reported at $372,000, which is up 11% from March and 20% from April of last year. While these are huge numbers, remember the median price is not the same as appreciation. It simply means half the homes sold were above that price and half were below it. Builders are not building many lower-priced homes and as a result, the median home price is being dragged higher.
Pending Home Sales, which measure signed contracts on existing homes, also declined in April, falling 4.4% from March. This is all due to a lack of inventory because the demand to buy homes is there. Pending Sales are up 51% compared to April of last year, but that figure is skewed because the lockdowns from the pandemic last spring greatly limited people going out and signing contracts.
Home Prices Heating Up
The Case-Shiller Home Price Index, which is considered the “gold standard” for appreciation, showed home prices rose 13.2% year over year in March. This is a 15-year high and even stronger than the 12% annual appreciation in the previous report!
The 20-city index rose from 12% to 13.3% year over year, with almost all the cities showing strong gains. Phoenix (+20%), San Diego (+19%), and Seattle (+18%) continued to report the highest annual gains among the 20 cities.
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. Note that 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.
Therefore, it should be no surprise that the data was even stronger than what Case Shiller reported. Home prices rose 1.4% from February to March and they were up 13.9% year over year, which is higher than the 12.3% annual appreciation in the previous report.
Initial Jobless Claims Reach Lowest Level Since Pandemic Began
The number of people filing for unemployment for the first time fell 38,000 in the latest week, as there were 406,000 Initial Jobless Claims filed. This is the lowest level of initial claims since the pandemic began last year.
Continuing Claims, which measure people who continue to receive regular benefits, also decreased by 96,000 to 3.64 million. June’s reporting will be important to monitor, as we should be able to gauge the impact of some states backing out of the extended benefits program.
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) decreased by roughly 40,000 claims combined.
All in all, 15.8 million people are still receiving benefits throughout all programs, which is a decline of 175,000 from the previous week.
What to Look for This Week
After Monday’s market closures in honor of Memorial Day, the economic calendar picks up with some key reports.
There will be an update on manufacturing when the ISM Index for May is released on Tuesday. The ISM Services Index follows Thursday.
But the main headliner will be reports from the labor sector, beginning with the ADP Employment Report, which will release Thursday instead of the usual Wednesday and will give us an update on private payrolls for May. The latest weekly Jobless Claims figures will also be delivered as usual on Thursday. Ending the week on Friday we will see the highly anticipated Bureau of Labor Statistics Jobs Report for May, which includes Non-farm Payrolls and the Unemployment Rate.
Mortgage Bonds have broken back above their 25-day Moving Average, which will now act as a floor of support. The next ceiling of resistance is the 103.752 Fibonacci level and then the 100-day Moving Average nearby after that. The 10-year has fallen back beneath 1.60% and there is room for yields to continue to the downside until reaching 1.487%.