Monday Market Update – 07/19/2021


The Federal Housing Finance Agency (FHFA) announced that Fannie Mae and Freddie Mac (the Enterprises) will eliminate the Adverse Market Refinance Fee for loan deliveries effective August 1, 2021. To allow families to save more money, lenders will no longer be required to pay the Enterprises a 50-basis point fee when they deliver refinanced mortgages. The fee was designed to cover losses projected as a result of the COVID-19 pandemic. The success of FHFA and the Enterprises’ COVID-19 policies reduced the impact of the pandemic and were effective enough to warrant an early conclusion of the Adverse Market Refinance Fee. FHFA’s expectation is that those lenders who were charging borrowers the fee will pass cost savings back to borrowers. The elimination of this fee will improve the affordability and availability of credit for borrowers, and ultimately help those seeking to refinance into lower rate loans and improve their financial condition as the country continues to recover from the COVID-19 pandemic. WHAT DOES THIS MEAN? RATES JUST WENT DOWN, AGAIN! If you missed the refinance boom, now is the time! AND Yes, it’s STILL a great TIME TO BUY!!

July 15, 2021

The summer swoon in mortgage rates continues as the 30-year fixed-rate mortgage fell for the third consecutive week. Since their peak at 3.18% in April, mortgage rates have declined by thirty basis points. While this decline is not large, it provides modest relief to borrowers who are purchasing in a market with strong home appreciation and scant inventory.

Opinions, estimates, forecasts, and other views contained in this document are those of Freddie Mac’s Economic & Housing Research group, do not necessarily represent the views of Freddie Mac or its management, and should not be construed as indicating Freddie Mac’s business prospects or expected results. Although the Economic & Housing Research group attempts to provide reliable, useful information, it does not guarantee that the information or other content in this document is accurate, current or suitable for any particular purpose. All content is subject to change without notice. All content is provided on an “as is” basis, with no warranties of any kind whatsoever. Information from this document may be used with proper attribution. Alteration of this document or its content is strictly prohibited. © 2021 by Freddie Mac.

Week of July 12, 2021 in Review

Inflation at both the consumer and wholesale levels came in much hotter than expected, and Fed Chair Jerome Powell made some important comments about this. Plus, Initial and Continuing Jobless Claims reached post-pandemic lows.

Consumer inflation as measured by the Consumer Price Index (CPI) rose by 0.9% in June while the year over year reading increased from 5% to 5.4% – the highest annual increase in almost 13 years! Core CPI, which strips out volatile food and energy prices, almost doubled expectations as it was up 0.9% in June while year over year Core CPI saw the highest increase in 29 years! However, there are several important nuances to this report, especially regarding rent prices, as detailed below.

Wholesale inflation was also much hotter than expected, per the Producer Price Index (PPI), which rose 1% in June and 7.3% on a year over year basis (up from 6.6%). Core PPI also rose more than expected.

Inflation is critical to monitor because rising inflation can have a big impact on Mortgage Bonds and the home loan rates tied to them. And one of the biggest questions at the moment is whether the factors impacting inflation are transitory. Fed Chair Powell made important remarks on this very point last week, which we delve into as well.

Initial Jobless Claims declined by 26,000 in the latest week, as the number of people filing for unemployment benefits fell to 360,000, which is a post-pandemic low. The number of people continuing to receive regular benefits also came in at a post-pandemic low of 3.2 million, while pandemic-related benefits declined as well. A total of 13.8 million people are still receiving benefits throughout all programs, which is down 334,000 from the previous week. This data does seem to reflect the impact of states that have already ended extended benefits.

Retailers had something to celebrate as sales rose by 0.6% in June, which was better than the expected 0.4% decrease. However, May’s figure was revised lower from a loss of 1.3% to a loss of 1.7%. And optimism is growing among small businesses, per the National Federation of Independent Business Optimism Index, which rose to 102.5 in June, the first time it was over 100 since last November.

Lastly, investors were closely watching Monday’s 10-year Treasury Note Auction and Tuesday’s 30-year Bond Auction, which ended up having differing results. Find out how the markets reacted.

Inflation Much Hotter Than Expected

The Consumer Price Index (CPI), which measures inflation on the consumer level, rose by 0.9% in June, which was much hotter than the 0.5% increase that was expected. The year over year reading increased from 5% to 5.4%, which was the highest year over year increase in almost 13 years!

Core CPI, which strips out volatile food and energy prices, was also up 0.9% in June, almost double expectations. On a year over year basis, Core CPI increased from 3.8% to 4.5%, which is the highest year over year increase in 29 years!

Within the report, rents rose 0.2% in June, increasing by only 1.9% on a year over year basis. Owners’ equivalent rent rose 0.3% in June and 2.3% year over year. But there are several important things to understand about this data, which is based on a survey that asks homeowners, “If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?”

Understandably, this is very subjective and many people would be guessing how much their home would rent for. This is the way the CPI tries to account for the change in home prices – and this component makes up 24% of the CPI report!

This data regarding rent is significantly lagging other rental indexes that have shown 5%+ increases in rental prices. In other words, an argument can be made that even though consumer inflation is hot, it could actually be hotter by 1% because this component of the index is so flawed.

However, on the other side of the coin, this type of inflation is not felt by everyone, as people only experience housing or rental inflation when they purchase or start a new lease agreement.

Wholesale inflation was also much hotter than expected, per the Producer Price Index (PPI), which rose 1% in June and 7.3% on a year over year basis (up from 6.6%). Core PPI, which again strips out food and energy prices, rose 1% in June and 5.6% on a year over year basis. This annual reading was also much hotter than expectations and up from 4.8%.

Is the Fed Blinded to Inflation?

Rising inflation is always important to monitor since inflation erodes a Bond’s fixed rate of return. In other words, rising inflation can cause Bonds to worsen or lose value. This includes Mortgage Bonds, to which home loan rates are inversely tied. When Mortgage Bonds move lower, be it due to rising inflation or other reasons, home loan rates move higher.

One of the biggest questions right now is whether or not some of the factors influencing inflation are going to be transitory. Last week, Fed Chair Jerome Powell testified in front of Congress and in his prepared remarks, he said that the Fed will alter monetary policy only if inflation is materially and persistently on a higher path. However, he did state during the Q&A session that inflation was hotter than the Fed expected and that they expect hot inflation to continue until moderating in the medium term.

And of note, Treasury Secretary Janet Yellen said that she expects several more months of hot inflation, echoing his thoughts.

One thing that Powell may be looking at is the breakdown of the inflation data within the CPI report, as 10% of the components made up the majority of the rise. For example, items like cars and computers that need chips, leisure and hospitality, and airline tickets all rose 5% last month. When we look at the other 90% of the components, they only rose 0.2% from May to June and 2.1% year over year. The Fed seems to be banking on these being transitory bottlenecks.

Keeping an eye on inflation is always important and remains especially critical in the coming months, to see if these factors are indeed transitory. And watching to see what actions the Fed does – or doesn’t – take to alleviate inflation will be crucial as well.

Powell also reiterated that the Fed will be giving lots of notice before tapering their purchases of Mortgage Backed Securities (MBS) and Treasuries, which have been ongoing to help stabilize the markets. The Fed’s upcoming meetings should give further clarity regarding this timing. Given Powell’s comments, they may not be on pace to begin tapering until 2022.

Initial and Continuing Jobless Claims Reach Post-Pandemic Lows

 Jobless Claims 7

The number of people filing for unemployment for the first time fell by 26,000 in the latest week, as Initial Jobless Claims reached 360,000. California (+58K), New York (+33K) and Texas (+32K) reported the largest number of claims.

The number of people continuing to receive regular benefits also decreased by 126,000 to 3.2 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 as well, by 334,000 combined.

All told, 13.8 million people are still receiving benefits throughout all programs, which is down 334,000 from the previous week. We have seen this number decline by roughly 800,000 over the past two weeks. Although this data is lagging (due to the time it takes people to find employment, and then for the reporting to occur), it would appear that we are seeing the impact from some of the states that cut extra benefits ahead of the Labor Day expiration.

A Note Regarding Housing Inventory

According to a new report from the National Association of Realtors, construction of long-term housing fell 5.5 million units short of historical levels over the past 30 years. To address the issue, the report shows that over 2 million housing units would need to be added per year.

While construction has picked up, even if building were to continue at the current pace, it would still take more than 20 years to close the 5.5-million-unit housing gap. This is further proof that inventory levels will remain tight for the foreseeable future, and this week’s upcoming reports on Housing Starts, Building Permits and Existing Home Sales will provide important news on construction and inventory as well.

Auctions Have Mixed ResultsAll eyes were on Monday’s 10-year Treasury Note Auction and Tuesday’s 30-year Bond Auction, with investors looking to see the level of demand. High demand, which is reflected in the purchasing of Bonds and Treasuries, can push prices higher and yields or rates lower. Weak demand, on the other hand, can signal that investors think yields will continue to move higher, which can have a negative effect on rates.

Monday’s 10-year Treasury Note Auction was met with above average demand. The bid to cover of 2.39 was just under the one-year average of 2.42. Direct and indirect bidders took 81% of the auction compared to 77.5% of the auction in the previous 12. Mortgage Bonds improved on the news, while Treasury Yields fell from their intraday highs.

However, Tuesday’s 30-year Bond Auction was met with below average demand. The bid to cover of 2.19 was below the one-year average of 2.33. Direct and indirect bidders took 77.7% of the auction compared to 80% in the previous 12. Mortgage Bonds reacted negatively to the news.

What to Look for This Week

Housing news highlights the week ahead, beginning Monday with July’s National Association of Home Builders Housing Market Index, which is a near real-time read on builder confidence.

June’s Housing Starts and Building Permits follow on Tuesday, with Existing Home Sales for June being released on Thursday.

Also on Thursday, the latest weekly Jobless Claims data will be reported, while Wednesday’s 20-year Bond Auction has the potential to move the markets.

Technical PictureMortgage Bonds continue to trade in the middle of a wide range between support at the 50-day Moving Average and overhead resistance at 103.782. The 10-year ended last week trading at 1.30% after testing support at 1.29

Christian Carr
Christian Carr NMLS #1466899 650.207.4364

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