Mortgage Rates Decrease Slightly
Freddie Mac Primary Mortgage Market Survey as of February 24, 2022
Even with this week’s decline, mortgage rates have increased more than a full percent over the last six months. Overall economic growth remains strong, but rising inflation is already impacting consumer sentiment, which has markedly declined in recent months. As we enter the spring homebuying season with higher mortgage rates and continued low inventory, we expect home price growth to remain firm before cooling off later this year.
Week of February 21, 2022 in Review
Important reports on inflation and housing were released but these took a backseat to geopolitical news, as ongoing tensions culminated in Russia’s invasion of Ukraine last Thursday.
The Fed’s favorite measure of inflation, Personal Consumption Expenditures (PCE), showed that headline inflation came in hotter than expected with a 0.6% rise in January. Year over year, the index increased from 5.8% to 6.1%, which is the hottest level in 39 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 4.9% to 5.2%.
Rising inflation is crucial to monitor because it can impact both Mortgage Bonds and mortgage rates. Don’t miss our important explanation below.
In housing news, sales of new homes declined 4.5% from December to January at an 801,000 unit annualized pace. However, this was much stronger than expectations of an 8.6% decline and sales in December were also revised higher, so the report wasn’t as negative as the headline figure may imply.
Pending Home Sales, which measure signed contracts on existing homes, also fell 5.7% in January. Once again, revisions to December’s reading made the decline not as high as the headline number suggests. While there’s no doubt higher interest rates could be impacting demand, the real story here is the record low inventory of existing homes available at the end of January, which has impacted sales.
Tight supply continues to be supportive of home price appreciation. The Case-Shiller Home Price Index showed home prices rose 0.9% in December and 18.8% year over year. The Federal Housing Finance Agency (FHFA), which measures home price appreciation on single-family homes with conforming loan amounts, also reported that home prices rose 1.2% in December and were up 17.6% year over year.
Over in the labor sector, the number of people filing for unemployment benefits on both an initial and continuing basis declined in the latest week, with claims back at strong pre-pandemic levels. There are now 2.032 million people in total receiving benefits, which is a stark contrast to the nearly 20 million people receiving benefits in the comparable week last year.
Meanwhile, the second estimate of Gross Domestic Product (GDP) for the fourth quarter of last year showed that the US economy grew by 7% on an annualized basis, which was in line with expectations.
There was volatility throughout global markets last week as Russia’s long-feared invasion of Ukraine began on Thursday. As can happen during times of geopolitical uncertainty, we saw a flight to safety where Bonds can act as a safe haven for investors. This can cause riskier assets like Stocks to sell off, with that money flowing into the safer Bond market, causing Bond prices to move higher and their corresponding yields lower. Investors will be closely watching this dynamic in the weeks to come, as the world can only hope for a quick and peaceful resolution to this conflict.
Annual Inflation Reaches 39-Year High
The Fed’s favorite measure of inflation, Personal Consumption Expenditures (PCE), showed that headline inflation rose 0.6% in January, which was hotter than expectations. This caused the year over year reading to increase from 5.8% to 6.1%, which is the hottest level in 39 years!
Core PCE, which strips out volatile food and energy prices and is the Fed’s real focus, was in line with estimates as it was up 0.5%. The year over year reading increased from 4.9% to 5.2%.
Private sector wages/salaries rose 0.5% in January. If we annualize the past six months, private sector wages are up almost 10% annually.
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.
The Fed is expected to take action to combat inflation at its next Federal Open Market Committee meeting March 15-16. Note that the Fed has two levers they can pull for tightening the economy – hiking their benchmark Fed Funds Rate and reducing their balance sheet. The Fed Funds Rate is the interest rate for overnight borrowing for banks and it is not the same as mortgage rates.
Hiking the Fed Funds Rate will actually be a good thing for mortgage rates, as the Fed curbs inflation and preserves the fixed return a longer data Bond provides. However, reducing their balance sheet (which means allowing Bonds to fall off their balance sheet and no longer reinvesting in them each month) would cause more supply on the market that has to be absorbed. This can cause mortgage rates to move higher.
Fed members have expressed varying opinions regarding what action they should take. It is important to monitor this situation, as the Fed’s decision will certainly have an impact on the markets and mortgage rates.
New and Pending Home Sales Decline in January
New Home Sales, which measure signed contracts on new homes, were down 4.5% from December to January at an 801,000 unit annualized pace. However, this was much stronger than expectations of an 8.6% decline.
In addition, sales in December were revised higher, so January’s sales were only down around 1.0% from what was originally reported for December. Year over year sales were down 19.3%.
The median home price was $423,300, which is up from December’s reading. Note 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. The median home price is 13.4% higher than it was in January 2021, which points to an increase in higher-priced homes sold.
Pending Home Sales, which measure signed contracts on existing homes, fell 5.7% in January. While this was weaker than expected, December’s reading was revised higher, so when factoring that in, January’s sales were down closer to 4%.
Pending Home Sales are now down 9.5% year over year. While there’s no doubt higher interest rates could be impacting demand, the real story here is inventory. There were only a record low 860,000 existing homes for sale at the end of January, which is 16.5% lower than last year. Quite simply, if there were more homes for sale, there would be more sales.
Home Price Appreciation Remains Strong
The Case-Shiller Home Price Index, which is considered the “gold standard” for appreciation, showed home prices rose 0.9% in December and 18.8% year over year. This annual reading was unchanged from November’s report.
The top three performing cities were Phoenix (+33%), Tampa (+29%) and Miami (+27%). Even the three worst-performing cities, including Chicago, Minneapolis and Washington, saw roughly 11% gains.
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 has been tight and demand strong.
Home prices rose 1.2% in December and were up 17.6% year over year, which was a slight increase from the 17.5% rise reported for November.
Jobless Claims Decline in Latest Week
Initial Jobless Claims fell by 17,000 in the latest week, as the number of people filing for benefits for the first time totaled 232,000.
Continuing Claims, which measure people who continue to receive benefits after their initial claim is filed, also decreased 112,000 to 1.48 million.
There are now 2.032 million people in total receiving benefits, which is a decrease from 2.063 million in the prior week and a stark contrast to the nearly 20 million people receiving benefits in the comparable week last year. Claims are at very strong pre-pandemic levels, showing that the labor market remains tight.
What to Look for This Week
Manufacturing news kicks off the week, beginning Monday with February’s Chicago PMI. The ISM Index for February will be reported on Tuesday.
Then, labor sector reports will dominate the economic calendar. First on Wednesday, the ADP Employment Report will give us an update on private payrolls for February. Thursday brings the latest Initial Jobless Claims data. Then ending the week on Friday, the highly anticipated Bureau of Labor Statistics Jobs Report for February will be released, which includes Non-farm Payrolls and the Unemployment Rate.
Mortgage Bonds bounced off support at 99.984 Friday morning and ended the week trading in a wide range between this strong and reliable floor and resistance at 100.617. The 10-year is trading at around 1.97% in a wide range of its own, between support at the 25-day Moving Average and a ceiling at 2.0