Primary Mortgage Market Survey
Week of July 26, 2021 in Review
Home price appreciation set another record in May, while New and Pending Home Sales dropped in June. Inflation remains hot but was not as hot as expected, per the Fed’s favored inflation measure, Personal Consumption Expenditures. And speaking of the Fed, their meeting of the Federal Open Market Committee was notable for both things they said, and things they didn’t say.
Sales of new homes plunged 6.6% in June, coming in well beneath expectations of a 3.4% gain. But when we take a closer look at the data, was the decline because of a lack of demand or a lack of supply? Don’t miss the important analysis below.
Pending Home Sales, which measures signed contracts on existing homes, also decreased by 1.9% in June, though this followed an 8% rise in May. Year over year contracts are down 1.9% as well.
Meanwhile, rents are continuing to accelerate per Zillow, as their Rent Index rose 1.8% in June alone and 7.1% year over year. The comparisons to last year could cause some skewing, but the index is up 5.1% from March alone and is the fastest pace in the history of the data! Plus, there’s further data that rents are on the rise, which is highlighted below.
Consumer inflation was up 0.5% in June per the Fed’s favored measure, Personal Consumption Expenditures (PCE), though this was lower than expectations. Year over year the index remained at a very hot 4% but this was also below expectations. Core PCE, which strips out volatile food and energy prices, also increased from 3.4% to 3.5%, which is still hot but under the 3.7% anticipated.
Speaking of the Fed, they held their two-day Federal Open Market Committee meeting and made several important comments about inflation and their ongoing purchases of Mortgage Backed Securities and Treasures, which we analyze in detail.
Lastly, the first look at second quarter GDP was reported and it was a big miss. The market was expecting 8.4% growth and instead we saw 6.5%. Part of the reason was due to inventories, which we know companies are not able to build at this point in time. However, when companies are able to do so, this will add to GDP in the future.
New and Pending Home Sales Cool in June
New Home Sales, which measures signed contracts on new homes, were down 6.6% in June, which was a significant miss and well beneath expectations of a 3.4% gain.
Looking at inventory levels, there were only 353,000 new homes for sale, though this is up 7% from May. And taking a deeper look at the sales and inventory, 77% of the sales in June were for homes not started or still under construction. Meanwhile, 90% of the for-sale inventory at the end of June were not started or still under construction.
There is clearly a huge backlog of construction for builders, which is why the nation’s largest builders like D.R. Horton are pulling back on sales to let supply catch up to meet demand. This is the reason for the decline in sales, not a lack of demand.
Also of note, the median home price was reported at $362,000, which is down 5% from May’s report and up 6% year over year. The median home price is not the same as appreciation, which we discuss in detail below, but rather it means that half the homes sold were above that price and half were below it.
Pending Home Sales, which measures signed contracts on existing homes, decreased by 1.9% in June after an 8% rise in May. Year over year contracts are down 1.9% as well.
While low inventory certainly remains challenging for homebuyers, renting is not a great option either. In addition to the previously mentioned data from Zillow, Invitation Homes, the largest single-family landlord in the U.S., accelerated rental increases across its portfolio of more than 80,000 properties. They raised rents by 14% on new leases and almost 6% on renewals.
So, while home prices are up 16.6% year over year as discussed below, rents on new leases are not too far behind at 14%. The big thing to remember is that those rents can continue to go up each year and according to Invitation Homes, their renewals went up almost 6%. With a home purchase, unless you have an adjustable rate mortgage, your payment will remain the same. Of course, taxes and insurance can rise modestly, but this is nothing compared to rental increases. Additionally, remember that part of a mortgage payment is your own money in principal.
Home Appreciation Hits Record High
The Case-Shiller Home Price Index, which is considered the “gold standard” for appreciation, showed home prices rose 2.1% in May and 16.6% year over year. This annual reading is up almost 2% from the annual price gains seen in April and is also a record high.
The 20-city index rose 17% year over year, with almost all the cities showing strong gains. Phoenix (+26%), San Diego (+25%), and Seattle (+23%) continued to report the highest annual gains among the 20 cities. In fact, the slowest annual price gain was Chicago at “only” 11%.
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. 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.
As such, it’s no surprise that the data was even stronger than what Case Shiller reported. Home prices rose 1.7% in May and they were up a staggering 18% year over year, which is even higher than the 15.7% annual appreciation reported for April.
Inflation Still Hot But Beneath Expectations
The Fed’s favored measure of inflation, Personal Consumption Expenditures (PCE), showed that headline inflation was up 0.5% in June, which was lower than expectations of 0.8%. Year over year the index remained at a very hot 4% but it was beneath the 4.2% expected.
Core PCE, which strips out volatile food and energy prices and is the Fed’s real focus, was up 0.4% in June. Year over year, Core PCE increased from 3.4% to 3.5%, which is still hot but under the 3.7% anticipated.
You may be wondering why the PCE report is trending lower than the Consumer Price Index (CPI) report the was released earlier in the month. The reason is the weightings within each report. PCE only has a 12% weighting on housing versus 24% in CPI and housing of course is one of the largest expenses most individuals have.
The Fed Clarifies “Transitory” Inflation
The Fed began their two-day Federal Open Market Committee meeting last Tuesday, with their Monetary Policy Statement and press conference following on Wednesday. Of note, Fed Chair Jerome Powell said the U.S. economy is still a good deal away from making “substantial further progress” toward the Fed’s dual mandates of stable prices and maximum employment.
“I’d say we have some ground to cover on the labor market side,” Powell said. “I think we’re someway away from having had substantial further progress toward the maximum employment goal.”
The Fed believes our path of recovery will depend on the virus, and they think that future waves will have less of an impact on the economy.
We’ve been hearing the term “transitory” used often to describe the Fed’s views on current inflation trends. Powell added some clarity to the term last week, saying that “transitory” simply means it is not something that should last for several years. “The concept of transitory is that price increases will happen. We’re not saying they will reverse, but the process of inflation will stop.”
Powell later added that what has happened in the past year is an example of “a price increase but not an inflation process.” The Fed expects a few more months of hot inflation, followed by a decline.
On the subject of when the Fed might start tapering their purchases of Mortgage Backed Securities (MBS) and Treasuries, which have been ongoing to help stabilize the markets, the Fed did not provide any direction on timing.
Powell did say that, “There is little support for the idea of tapering MBS earlier than Treasuries.” However, he noted there was some support for tapering MBS at a faster rate than Treasuries when they do start tapering their purchases.
Based on Powell’s comments, it seems the Fed is still a long way off from tapering their purchases, and they will likely not begin doing so until next year. When tapering does occur, the Fed will likely taper at a snail’s pace but taper more of MBS than Treasuries at that time.
Initial Jobless Claims Hover Around 400,000
The number of people filing for unemployment for the first time fell by 24,000 in the latest week, with Initial Jobless Claims reported at 400,000. This is a slight improvement from the previous week, though it seems we have stalled near these levels. One key reason is the shortage in chips, causing manufacturing plants to take pauses and shut down because they don’t have the supplies they need to stay open.
The number of people continuing to receive regular benefits was near unchanged at 3.3 million, which is near a post-pandemic low.
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) increased by 211,000 combined after a 1.1 million drop in the previous report.
All in all, 13.2 million individuals are still receiving benefits throughout all programs, which is up 582,000 from the previous report. It’s likely that all of the figures within this report will improve once September comes and all of the extended benefits expire.
What to Look for This Week
Manufacturing news kicks off the week when July’s ISM Index is released on Monday, while the ISM Services Index follows on Wednesday.
Then, the rest of this week’s calendar is focused on the labor sector, beginning Wednesday when the ADP Employment Report for July will give us an update on private payrolls. The latest Jobless Claims data will be reported as usual on Thursday, while Friday brings the highly anticipated Bureau of Labor Statistics Jobs Report for July, which includes Non-farm Payrolls and the Unemployment Rate.
Mortgage Bonds have broken above the 200-day Moving Average and are now approaching the next ceiling at the 102.04 Fibonacci level. The 10-year has made a nice move lower after testing the 200-day Moving Average and has room to continue its decline until reaching 1.19%.