Mortgage Rates Continue to Move Down

Primary Mortgage Market Survey from July 8, 2021

Mortgage rates decreased this week following the dip in U.S. Treasury yields. While mortgage rates tend to follow Treasury yields closely, other factors can be impactful such as the labor markets, which are continuing to improve per last week’s jobs report. We expect economic growth to gradually drive interest rates higher, but homebuyers and refinance borrowers still have an opportunity to take advantage of 30-year rates that are expected to continue to hover around three percent. Looking to buy or refinance? NOW IS THE TIME!

Week of July 5, 2021 in Review

After the Independence Day fireworks on Sunday, the rest of the week was quiet with just a handful of economic reports to note.

There was news from the housing sector, with more evidence that home prices continue to appreciate nationwide. CoreLogic reported that home prices increased 2.3% from April to May and 15.4% compared to May of last year. Within the report, the hottest markets were Phoenix (+24%), San Diego (+19%) and Denver (+16%).

While the number of people filing for unemployment for the first time rose slightly in the latest week, per the latest Initial Jobless Claims data, there were significant declines in the number of people receiving continuing and pandemic extended benefits. This could be a result of the 22 states that have ended extra benefits thus far. All in all, 14.2 million individuals are still receiving benefits throughout all programs, which is down 450,000 from the previous week.

On a related note, the JOLTS (Job Openings and Labor Turnover Survey) report showed that there were 9.2 million job openings in May, which is a record high. Meanwhile, the National Federation of Independent Business released its June Small Business Jobs Report, which noted that 46% of small business owners reported job openings they could not fill last month. In addition, per the NFIB’s report, this struggle to find qualified workers has caused compensation to rise, as a net 39% (seasonally adjusted) of owners raised compensation, which is a record high.

Lastly, the minutes from the Fed’s June meeting were released and they showed that members noted that risks to inflation projections were tilted to the upside and that the process of reopening the economy has likely been uneven across different sectors.

The minutes also showed that there was disagreement between members over the process of tapering the Fed’s purchases of Mortgage Backed Securities (MBS) and Treasuries, which have been ongoing to help stabilize the markets. Read on to learn more about the differing opinions.

Home Price Appreciation Continues

CoreLogic released their Home Price Index report for May, showing that home prices increased 2.3% from April. Prices also rose 15.4% on a year over year basis, which is up from the 13% annual gain reported for April.

Within the report, the hottest markets once again were Phoenix (+24%), San Diego (+19%) and Denver (16%).

CoreLogic forecasts that home prices will rise 0.8% in June and 3.4% in the year ahead. However, it’s important to note that CoreLogic has consistently under forecast both monthly and annual appreciation while then slowly revising their numbers higher. For example, just looking at the latest report, CoreLogic had forecasted 1.1% appreciation for May – and yet they reported 2.3%. In addition, they previously forecasted home prices would be down 6.6%…while we are up 15.4%. It is likely appreciation will be higher than what they have forecasted moving ahead, which is consistent with other forecasts out there.Significant Declines in Continuing and Pandemic Jobless Claims

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 slightly to 373,000. California (+59K), Pennsylvania (+31K) and New York (+25K) reported the largest number of claims.

However, the number of people continuing to receive regular benefits decreased by 145,000 to 3.3 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) fell by 465,000 combined.

While there was not much of a change in Initial Jobless Claims, the significant declines in the number of continuing and extended benefits could be a result of the 22 states that have ended extra benefits thus far.

All in all, 14.2 million individuals are still receiving benefits throughout all programs, which is down 450,000 from the previous week.

On a related note, the JOLTS report showed that there were 9.2 million job openings in May, which is a record high. Though the JOLTS report is for May while weekly claims are more real-time, it will be important to see if the number of job openings declines in the coming months and especially come September once all states will be removing extra benefits.

Compensation Rising At a Record Level

The National Federation of Independent Business released its June Small Business Jobs Report, which noted that 46% of small business owners reported job openings they could not fill last month. This is down two points from May but still well above the 48-year historical average of 22%.

This struggle to find qualified workers has caused compensation to rise at a record level. A net 39% (seasonally adjusted) of owners raised compensation, which is up five points and a record high. In addition, a net 26% plan to raise compensation in the next three months, which is up four points.

Fed Members Debate Taper Timing

The minutes from the Fed’s June 15-16 meeting were released and they showed that there was disagreement between members over the process of tapering the Fed’s purchases of Mortgage Backed Securities (MBS) and Treasuries, which have been ongoing to help stabilize the markets.

Some members saw benefits to reducing the pace of MBS purchases in light of pressures in the housing market, whereas others felt both MBS and Treasuries should be reduced simultaneously. Fed officials noted that ‘substantial further progress’ toward their maximum employment and price stability goals has not yet been met, which remains a determining factor in their decision.

The Fed said that they would provide notice well in advance of an announcement to reduce purchases. This means, for instance, if they are considering tapering their purchases near the end of the year, they would have to announce this at their July 27-28 meeting in a few weeks, their meeting in Jackson Hole at the end of August, or their September 21-22 meeting. It’s likely we will get more clues at the meeting this month and estimate a taper plan announcement in August or September.

And of note, members also said that risks to inflation projections were tilted to the upside. This is significant because inflation reduces the value of fixed investments like 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 is always important to monitor.

What to Look for This Week

Inflation will once again make headlines, beginning Tuesday when the Consumer Price Index for June will be reported. We’ll also get an update on wholesale inflation on Wednesday when June’s Producer Price Index is released.

Tuesday also brings an update on how small businesses are feeling with the National Federation of Independent Business Small Business Optimism Index.

On Thursday, the latest weekly Jobless Claims data will be reported as usual, along with regional manufacturing news for July via the Empire State Index and Philadelphia Fed Index.

Ending the week on Friday, June’s Retail Sales report will be released.

There are also two important auctions to note, with the 10-year Note auction coming first on Monday, followed by the 30-year Bond auction on Tuesday.

Technical Picture

Mortgage Bonds were pushed lower from overhead resistance and are now in a wide range between the 103.782 ceiling and support at the 50-day Moving Average. The upward trendline is still intact but if this is broken, Bonds will likely move lower to the 50-day Moving Average. The 10-year bounced higher off 1.29% and ended last week trading at 1.36%.