Mortgage Rates Remain Virtually Flat

September 16, 2021

It’s Groundhog Day for mortgage rates, as they have remained virtually flat for over two months. The holding pattern in rates reflects the markets’ view that the prospects for the economy have dimmed somewhat due to the rebound in new COVID cases. While our collective attention is on the pandemic, fundamental changes in the economy are occurring, such as increased migration, the extended continuation of remote work, increased use of automation, and the focus on a more energy efficient and resilient economy. These factors will likely lead to significant investment and new post-pandemic economic models that will spur economic growth.

Week of September 13, 2021 in Review

The economic calendar was relatively quiet, but news on consumer inflation, housing, jobless claims and retail sales made headlines.

Consumer inflation as measured by the Consumer Price Index (CPI) rose by 0.3% in August, which was in line with expectations. The year over year reading moderated slightly from 5.4% to 5.3%. Core CPI, which strips out volatile food and energy prices, rose by 0.1%, though this was lower than expectations. On a year over year basis, Core CPI decreased from 4.3% to 4%.

Inflation is critical to monitor because rising inflation reduces a Bond’s fixed rate of return. In other words, inflation can cause Mortgage Bonds to worsen or lose value and the home loan rates tied to them to rise. Does the decline in the annual CPI readings indicate that further decreases in inflation are ahead? Read on for important analysis about this. 

In housing news, Zillow’s Rental Index report showed that rents rose 1.7% in August and 11.5% year over year. Zillow also said that home prices rose 1.8% in August and 17.7% year over year. They reported that inventory, although trending higher month over month, is still down 23% annually. Zillow also forecast that home values will grow nearly 12% over the next 12 months, which is very strong.

The ongoing dynamic of high demand and low inventory of homes has been a major factor in the rise in rental and home prices. Some people have wondered if the number of homes that will be leaving forbearance this fall will have an impact on inventory, as millions of homeowners paused or lowered their mortgage payments by entering forbearance during the pandemic in an effort to avoid foreclosure. We breakdown some important numbers about this below.

Initial Jobless Claims did tick higher in the latest week, as the number of people filing for unemployment benefits for the first time rose 20,000 to 332,000. While this was a move in the wrong direction, claims are getting closer to pre-pandemic levels of 180,000 to 200,000 new claims each week. In addition, the number of people continuing to receive regular benefits declined to a pandemic era low.

In other news, shoppers were out in droves last month as Retail Sales were much stronger than anticipated, rising 0.7% from July to August versus the expected 0.8% decrease. When stripping out car sales, which have been hindered by the ongoing chip shortage, sales rose 1.8%. However, sales in July were revised lower from a loss of 1.1% to a loss of 1.8%.

Lastly, there was positive news from the manufacturing sector, as regional reports for both New York and Philadelphia beat expectations in September. It will be important to see if these reports signal continued expansion or if ongoing supply chain issues will remain a headwind.

Moderating Inflation Start of a Trend?

The Consumer Price Index (CPI), which measures inflation on the consumer level, rose by 0.3% in August and was in line with expectations. The year over year reading moderated slightly from 5.4% to 5.3%.

Core CPI, which strips out volatile food and energy prices, rose by 0.1%, though this was lower than expectations. On a year over year basis, Core CPI decreased from 4.3% to 4%.

Within the report, rents rose 0.3% in August and 2.1% on a year over year basis. However, the CPI report is not capturing the increases we are seeing in rents that are being reported elsewhere showing around 2% increases in August and up double digit increases year over year, such as the data from Zillow below. We may see some catch up in this CPI data in future months but for now the reporting is being dragged down by their methodology.

One of the main questions about the August CPI numbers is whether this slight moderation in inflation is a sign that inflation will continue to fall in the months ahead?

Remember that to calculate year-over-year inflation, the readings for the more current months replace the older readings from 2020 (for e.g., the readings for August 2021 replaced the readings for August 2020). The monthly reading for August 2020 for both headline and Core CPI was 0.4%. It was replaced by 0.3% for headline CPI and 0.1% for Core CPI from this August, which is why both annual readings in August declined.

However, the next several readings from 2020 were much lower, so if we continue to see monthly increases going forward this fall, the year over year CPI figures could start to accelerate again.

On a related note, the National Federation of Independent Business Small Business Optimism Index showed that companies that expect higher selling prices rose 3 points to 49%, which is a 41-year high. This points to continued inflation from small businesses.

Rents On the Rise

Zillow released their Rental Index report, showing that rents rose 1.7% in August and 11.5% year over year. Zillow also said that home prices rose 1.8% in August and 17.7% from the same time last year. They forecast that home values will grow nearly 12% over the next 12 months, which is very strong.

Zillow also reported that although inventory is trending higher month over month, it is still down 23% from August of last year.

While some pundits have predicted that a lot of inventory will hit the market due to homes leaving forbearance this fall, it’s important to really analyze the numbers.

Initially about 5 million entered forbearance and of those who exited thus far:

�  23% are now current

�  13% made a lump sum reinstatement payment to bring their account current

�  7% paid off loans through forbearance or a home sale (with no issues selling homes in this market)

�  28% have deferral plans or partial claims

�  12% exited forbearance into a loan modification

�  16% cancelled without a loss mitigation (in process of modification or still need to be reached)

�  Only 0.65% of exits to date have been into other resolutions which include short sales

Currently, there are around 1.5 million still in forbearance. If the above numbers continued, this would mean that only around 9,750 homes would go into some type of short sale or foreclosure. Given the record low inventory of homes currently on the market, this amount would be easily absorbed without having much of an impact on rising rental or home prices.

Initial Jobless Claims Tick Higher

Initial Jobless Claims rose by 20,000 in the latest week, as the number of people filing for unemployment benefits for the first time was reported at 332,000. While this was a move in the wrong direction, claims are getting closer to pre-pandemic levels of 180,000 to 200,000 new claims each week.

Continuing Claims, which measure people continuing to receive regular benefits, did reach a pandemic-era low, declining 187,000 to 2.67 million.

The number of people receiving the extended $300 benefits decreased by 212,000. However, 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), rose by a combined 397,000.

As of this latest report, 12 million people are still receiving benefits throughout all programs, which is up 179,000 from the previous report. Remember that although the extra and pandemic-specific benefits expired on Labor Day, the metrics within this report are delayed by one to three weeks, so we won’t see the impact of the expiration for a few weeks.

What to Look for This Week

Housing news will dominate this week’s economic calendar, beginning Monday with the National Association of Home Builders Housing Market Index, which will provide an update on builder confidence for September.

On Tuesday, we’ll get an update on Housing Starts and Building Permits for August. On Wednesday, August Existing Home Sales will be reported while New Home Sales follows on Friday.

The latest Jobless Claims data will be reported as usual on Thursday.

Investors will also be watching Tuesday’s 20-year Bond auction for the level of demand, while the Fed will also be making headlines with Wednesday’s press conference and Monetary Policy Statement following their two-day FOMC meeting.

Technical Picture

After breaking beneath their 100-day Moving Average last Thursday, Mortgage Bonds moved lower Friday where they tested an important floor of support at the 100.863 Fibonacci level and then rebounded higher. The 10-year tested the 1.37% ceiling and then bounced lower and is battling with its 200-day Moving Average.