This past week, mortgage rates drifted to their lowest levels in weeks but as markets concur with the view that inflation increases are temporary, the Fed is beginning to look at discussions around tapering their purchases of mortgage backed securities. This led to a spike in rates and with already weakened purchase demand over the last couple of months, primarily due to affordability constraints stemming from high home prices, home purchases have the potential to stall slightly. With inventory tight, the slowdown in demand has yet to impact prices, meaning the summer will likely remain a strong seller’s market. Much of that will remain to be seen though, as rates are on the move up. BUT, it is STILL a great time to buy a home.
Average commitment rates should be reported along with average fees and points to reflect the total upfront cost of obtaining the mortgage. Visit the following link for the Definitions. Borrowers may still pay closing costs which are not included in the survey.
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Tapering Discussion Leads to Rate Volatility but Will it Impact Housing Prices?
Week of June 14, 2021 in Review
Inflation made headlines, as the Fed raised their inflation forecasts while annual wholesale inflation hit one of the hottest levels ever. Plus, higher costs and labor issues are impacting construction of new homes while Initial Jobless Claims increased in the latest week.
Wholesale inflation was hotter than expected in May, as the Producer Price Index (PPI) rose 0.8%. Year over year, PPI rose from 6.2% to 6.6% – one of the hottest readings ever! One of the main reasons for rising producer inflation is the shortage of labor. The employment situation remains challenging for many families relying on schools or childcare to open fully, and the availability of extended benefits has also impacted the labor force.
Inflation was certainly on the minds of Fed members at their latest Federal Open Market Committee meeting last week. Though the Fed kept their wording the same regarding inflation, noting that “inflation has risen, largely reflecting transitory factors,” they did significantly raise their inflation forecasts. The Fed also left their benchmark Fed Funds Rate and current pace of Mortgage Backed Securities (MBS) and Treasury purchases unchanged, as they will continue to purchase at least $120 billion in MBS and Treasuries for now.
Read on to learn why rising inflation matters to Mortgage Bonds – and the home loan rates tied to them.
In housing news, Housing Starts ticked up 3.6% in May, with starts on single-family homes up 4.2%. However, Building Permits, which are a good forward-looking indicator of construction, did tick lower last month. Single-family homes authorized but not started are up nearly 53% year over year, which points to delays due to higher costs and labor issues.
Builders actually cited costs and shortages of materials as the reason for the decline in builder sentiment in June. The National Association of Home Builders Housing Market Index, which measures builder confidence, decreased by 2 points from May’s revised figure of 83 to 81 in June. However, it’s important to note that 81 is still an extremely strong level of confidence, as any reading above 50 signals expansion.
Initial Jobless Claims moved in the wrong direction in the latest week, with the number of people filing for unemployment for the first time rising by 37,000 to 412,000. The number of people continuing to receive regular benefits was unchanged at 3.5 million while 14.8 million individuals are still receiving benefits throughout all programs.
Lastly, regional manufacturing reports for both the New York and Philadelphia regions missed expectations in June, as the Empire State Index was reported at 17.4 and the Philadelphia Fed Index was reported at 30.7. However, any reading above zero indicates expansion. Retail Sales also came in below expectations in May, decreasing by 1.3% versus the expected 0.5% decrease. However, sales for April were revised sharply higher from no change to a gain of 0.9% and May’s decrease likely reflects consumers shifting some of their spending to travel and other summer plans.
Wholesale Inflation Reading One of the Hottest Ever
The Producer Price Index (PPI), which measures wholesale inflation, rose 0.8% in May, which was hotter than the 0.6% expected. Year over year, PPI rose from 6.2% to 6.6% – one of the hottest readings ever!
Core PPI, which strips out volatile food and energy prices, rose 0.7% month over month and increased from 4.1% to 4.8% year over year.
One of the main reasons for producer inflation is the shortage of labor. The employment situation remains challenging for many families relying on schools or childcare to open fully and the availability of extended benefits has also impacted the labor force. Capacity utilization of factories is running at 75%, which means they have capacity to produce more but can’t because they can’t find enough workers, and this is causing prices to move higher.
Inflation is running very hot in both the Producer and Consumer reports and the Fed last week significantly raised their inflation forecasts, which caused the Bond market to sell off. The Fed now sees inflation averaging 3.4% in 2021, up from their original estimate of 2.4%. They do believe that inflation will fall back to 2.1% next year.
Why does high inflation matter?
Higher inflation typically drives home loan rates higher. That’s because inflation is the arch enemy of interest rates, since it erodes the buying power of the fixed return that a mortgage holder receives. While many factors influence the markets, I will be keeping a close eye on all the latest inflation data, and its impact on Mortgage Bonds and the home loan rates tied to them.
Rising Costs, Shortages of Materials and Labor Impact Construction
Housing Starts, which measure the start of construction on homes, were up 3.6% in May. While any increase is good news given the high demand for homes around the country, the reading was slightly beneath expectations. More importantly, however, Housing Starts on single-family homes were up 4.2%.
Building Permits, which are a good forward-looking indicator of construction, did fall 3% in May. Permits for single-family homes were also down 1.6%.
Single-family homes authorized but not started are up nearly 53% year over year, which points to delays due to higher costs and labor issues.
Builders actually cited “higher costs and declining availability for softwood lumber and other building materials” as the reason for the decline in builder sentiment in June. The National Association of Home Builders Housing Market Index, which measures builder confidence, decreased by 2 points from May’s revised figure of 83 to 81 in June.
All three components of the index declined by two points as well. Current sales conditions fell to 86, sales expectations for the next six months came in at 79, and buyer traffic ticked down to 71.
While the readings with the NAHB Housing Market Index have declined in recent months, it’s important to note that 81 is still an extremely strong level of confidence and is in the 98th percentile of readings dating back to 1985. For point of reference, any reading above 50 signals expansion.
Despite the scarcity of both labor and building materials, the high demand for homes continues to spur confidence among builders.
A Note About Rents
Recent reports show that rents are on the rise. Zillow reported that single-family rents were up 2.3% in May alone, due in large part to the lack of inventory. CoreLogic said that rents rose 5.3% year over year, which is the largest gain in nearly 15 years.
Rents for single-family detached homes (not townhomes) were up an even stronger 7.9% compared with a year ago, likely because individuals are seeking more outdoor space. Nearly half of millennials surveyed by CoreLogic and 64% of Baby Boomers said they “strongly prefer” to live in a single, stand-alone home.
Initial Jobless Claims Rise In Latest Week
Initial Jobless Claims moved in the wrong direction in the latest week, as the number of people filing for unemployment for the first time rose by 37,000 to 412,000. California (+68K), Pennsylvania (+29K) and Illinois (+28K) reported the largest number of claims.
The number of people continuing to receive regular benefits was unchanged at 3.5 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) decreased by roughly 325,000 combined.
All in all, 14.8 million individuals are still receiving benefits throughout all programs, which is down 560,000 from the previous week.
What to Look for This Week
More housing news is on deck this week, with May’s Existing Home Sales data being reported on Tuesday and New Home Sales on Wednesday.
Thursday brings the latest weekly Jobless Claims, as well as May’s Durable Goods Orders and the final reading on first quarter Gross Domestic Product.
Friday brings crucial inflation news for May when the Fed’s favored inflation report, Personal Consumption Expenditures, is released along with Personal Income and Spending.
After an initial move to the downside on Friday following comments from St. Louis Fed President, James Bullard, Mortgage Bonds rallied higher and broke back above the 103.055 Fibonacci level. The 10-year, after battling resistance at 1.50%, moved lower and is testing support at the 1.445 Fibonacci level. A break beneath this level could mean lower yields and further improvement for Mortgage Bonds.