Week of December 20, 2021 in Review
Inflation and home sales were on the rise in November, while Jobless Claims continue to reflect healthy, pre-pandemic levels.
The Fed’s favorite measure of inflation, Personal Consumption Expenditures, showed that headline inflation rose 0.6% in November, which was hotter than anticipated. Year over year, the index increased from 5.1% to 5.7%, which is the hottest reading in almost 40 years! Core PCE, which strips out volatile food and energy prices and is the Fed’s real focus, was up 0.5% while the year over year reading increased from 4.2% to 4.7%.
Rising inflation is crucial to monitor – don’t miss our important explanation about this.
In housing news, sales of existing homes rose for the third month in a row, up 1.9% from October to November to an annual pace of 6.46 million units. The lack of homes for sale continues to remain a challenge around the country, as there were only 1.1 million homes for sale at the end of November. This is down nearly 10% from October and 13.3% year over year.
New Home Sales were also up 12.4% from October to November, but there is more to this headline number. Meanwhile, multiple reports show that rents continue to rise, which further highlights the benefits of homeownership. Don’t miss the details about both of these stories below.
There was good news from the labor sector, as Jobless Claims continue to reflect pre-pandemic levels. There are now 2.137 million people in total receiving benefits, which is a healthy number and in stark contrast to the 20 million plus seen last year.
Lastly, the third reading of Gross Domestic Product (GDP) for the third quarter showed a slight revision higher from 2.1% to 2.3%, though this is still pretty anemic considering all of the stimulus. Investors were also closely watching last week’s 20-year Bond auction, which was met with above average demand. The bid to cover of 2.59 was higher than the one-year average of 2.34. Direct and indirect bidders took 85.6% of the auction compared to 78.2% in the previous 12.
Annual Inflation Reaches Hottest Level in Nearly 40 Years
The Fed’s favorite measure of inflation, Personal Consumption Expenditures, showed that headline inflation rose 0.6% in November, which was hotter than anticipated. This caused the year over year reading to increase from 5.1% to 5.7%, which is the hottest reading in almost 40 years!
Core PCE, which strips out volatile food and energy prices and is the Fed’s real focus, was up 0.5%, which was also above the consensus. The year over year reading increased from 4.2% to 4.7%.
Remember, inflation is the arch enemy of fixed investments like Mortgage Bonds because it erodes the buying power of a Bond’s fixed rate of return. If inflation is rising, investors demand a rate of return to combat the faster pace of erosion due to inflation, causing interest rates to rise. This is why keeping an eye on inflation remains critical.
Existing Home Sales Rise for Third Consecutive Month
Existing Home Sales, which measure closings on existing homes, were up 1.9% from October to November to an annual pace of 6.46 million units.
However, the low inventory of homes around the country remains a challenge for many buyers, as there were only 1.1 million homes for sale at the end of November. This is down nearly 10% from October and 13.3% year over year. Inventory is nearing the record low levels of just above 1 million that were seen earlier this year. The continued strong demand for homes and near record low inventory remains supportive of home prices.
The median home price was reported at $353,900, which is up almost 14% year over year. Remember that the median home price is not the same as appreciation. It simply means half the homes sold were above that price and half were below it.
First-time homebuyers accounted for 26% of sales, which is down from 29% in October. This decline is concerning and it’s important to monitor if this is related to seasonal factors or part of a bigger theme. First-time homebuyers, after all, are the engine of the housing market.
Cash buyers remained stable at 24%, while investors purchased 15% of homes, which is down from 17%. Foreclosures and short sales accounted for less than 1% of all transactions.
The Real Scoop on New Home Sales
New Home Sales, which measure signed contracts on new homes, were up 12.4% from October to November at a 744,000 annualized pace. However, this doesn’t tell the whole story. Sales for October were revised lower from 745,000 to 662,000, so when factoring this in, New Home Sales are really unchanged from October’s original reporting.
Year over year sales were down 14%, but the annual comparisons to November 2020 are tough because of the abnormalities in the market due to the pandemic.
The median home price came in at $416,900, which is up from $407,700 in October, and up 19% from last year. Again, the median home price is not the same as appreciation. It simply means half the homes sold were above that price and half were below it. A greater amount of higher-priced homes are being built because there is no margin in lower-priced homes, so naturally the median price is being driven higher.
Rents Continue to Rise
CoreLogic released their Single-Family Rent Index, showing that rents were up nearly 11% year over year in October, marking the sixth consecutive record high within this report. Detached rentals, which are in higher demand, rose by over 12% while attached rentals were up 9%.
Despite the challenges homebuyers are facing due to high demand, low inventory and an uptick in rates, there are still tremendous benefits in homeownership. Rents are rising aggressively, and renewals can continue to rise each year.
For instance, Realtor.com also reported data showing that rents were up almost 20% year over year in November. The national median rent reached $1,771, up almost $300 per month from last year. If we were to reverse engineer this at a 3.25% interest rate, it would equate to $70,000 in additional buying power for housing.
Remember that demographically, people are entering their 30’s in record-high numbers at almost 5 million per year, which should continue to provide robust demand for purchases and rentals.
Jobless Claims Reflect Pre-Pandemic Levels
The number of people filing for unemployment benefits for the first time was unchanged in the latest week, as Initial Jobless Claims were reported at 205,000. This follows the 52-year low that was reported a few weeks ago and is a healthy level. Remember that since this reading reflects the pace of firings and people filing for benefits, the lower the number the better.
Continuing Claims, which measures individuals who continue to receive benefits, decreased 8,000 to 1.859 million, once again reaching a pandemic-era low.
There are now 2.137 million people in total receiving benefits, which is a healthy number and in stark contrast to the 20 million plus seen last year. It also reflects that employers are having a hard time finding new workers and are reducing their pace of firings.
Family Hack of the Week
You’ll kick the new year off on a delicious note with these Cinnamon Rolls from our friends at Allrecipes – perfect for brunch on New Year’s Day, or any day of the year!
Preheat oven to 400 degrees Fahrenheit. Brush a 9-inch square baking dish with 2 tablespoons melted butter.
In a large bowl, whisk 2 cups all-purpose flour, 2 tablespoons sugar, 2 teaspoons baking powder and 1 teaspoon salt. Work 3 tablespoons of softened, unsalted butter into flour mixture. In a separate bowl, beat 3/4 cup milk and 1 egg together. Pour this into the flour mixture and stir with a rubber spatula until a soft dough forms.
Flour a work surface and roll dough into a 1/4-inch thick rectangle. Brush surface of dough with 2 tablespoons melted butter.
In a small bowl, whisk 1/2 cup white sugar, 1/2 cup brown sugar and 1 tablespoon cinnamon. Sprinkle 1/2 of the cinnamon sugar mixture into bottom of prepared baking dish and 1/2 on top of dough. Roll dough to form a log, cut into 18 rolls and place rolls into baking dish. Bake until the rolls are set, approximately 20 to 25 minutes.
While the rolls are baking, beat 1 cup confectioner’s sugar, 4 ounces cream cheese, 1/4 cup softened butter and 1/2 teaspoon vanilla extract until smooth. Once rolls are removed from oven, add frosting to them while hot and enjoy!
What to Look for This Week
Important housing data is ahead this week, beginning Tuesday when the latest home price appreciation figures for October from the Case-Shiller Home Price Index and the Federal Housing Finance Agency (FHFA) House Price Index are reported. Pending Home Sales for November follow on Wednesday.
On Thursday, be sure to look for the latest Jobless Claims data along with regional manufacturing news from December’s Chicago PMI.
Technical Picture
Mortgage Bonds remain in their downtrend, but support at 101.922 held at the end of last week. The 10-year broke above a duel ceiling comprised of the 200-day and 25-day Moving Averages. The next level of resistance is up at the 50-day Moving Average.