Monday Market Update – 05/09/2022

Mortgage Rates Increase

Freddie Mac Primary Mortgage Market Survey as of May 5, 2022

Mortgage rates resumed their climb this week as the 30-year fixed reached its highest point since 2009. While housing affordability and inflationary pressures pose challenges for potential buyers, house price growth will continue but is expected to decelerate in the coming months. This should not be read as “panic” but rather a return to something more “normal” in the housing market–whatever “normal” means. In my local market, we’ve seen home price appreciation of 20% (or higher) year over year. A house on my street sold for $1,000,000 in September of 2020 and then again in September of 2021 for $1,250,000 and house on the next block over just sold for $1,500,000. That kind of appreciation isn’t sustainable or healthy. We could use a return to normalcy. Here’s the thing though, we’re short on homes and heavy on buyers. You don’t need an advanced degree in economics to see that demand outstrips supply. In fact, nationally, there are four times more buyers than there were in 2008 and we’re four million homes short of the need. Even with rates on the rise, demand will still be there. So, if you are a buyer and you’re feeling overwhelmed and worn out, I understand. My advice is to just get in and start (join) the appreciation party. The home may not be perfect but as my 16-year-old says, “It doesn’t have to be perfect to be wonderful.” We’re expected to be in a short supply cycle for a while because as it’s been said a few times, we can’t build our way out of the shortage. Getting started now means that in 5 years time, you’ll likely have enough equity to buy that dream home…wait and you may find that it’s unattainable.

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Week of May 2, 2022 in Review

The Fed took action to fight inflation while the unemployment rate held steady. Here are the key headlines:

  • Fed Hikes Fed Funds Rate to Curb Inflation
  • Unemployment Rate Remains Stable – But for Wrong Reasons
  • Private Payrolls Miss Expectations in April
  • Is the Rise in Initial Jobless Claims the Start of a Trend?
  • Annual Home Price Appreciation Sets a New Record High

Fed Hikes Fed Funds Rate to Curb Inflation

The Fed met last week and hiked their benchmark Fed Funds Rate by 50 basis points, after hiking by 25 basis points in March. Note that the Fed Funds Rate is the interest rate for overnight borrowing for banks and it is not the same as mortgage rates. The Fed also said that they anticipate ongoing increases to the Fed Funds Rate, with 50 basis point increases likely at the next couple of meetings.

The Fed also laid out their balance sheet reduction plan. Starting June 1, the Fed will be reducing their balance sheet by $47.5 billion, divided into $30 billion in Treasuries and $17.5 billion in Mortgage-Backed Securities. They will continue to do so each month through August, but in September these figures will double.

What’s the bottom line? The Fed has been under pressure since late last year to take action to address inflation and they have two levers they can pull for tightening the economy – hiking their benchmark Fed Funds Rate and reducing their balance sheet.

Hiking the Fed Funds Rate can 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 would cause more supply on the market that has to be absorbed, which can cause mortgage rates to move higher. It will be crucial to monitor how the Fed tries to walk the tightrope of hiking and allowing a balance sheet runoff, as these actions will play a critical role in the direction of Mortgage Bonds and mortgage rates this year.

Unemployment Rate Remains Stable – But for Wrong Reasons

 bls jobs report

The Bureau of Labor Statistics (BLS) reported that there were 428,000 jobs created in April, which was just above market expectations. However, there were negative revisions to the data for February and March removing 39,000 jobs in those months combined, which tempered the optimism slightly. The Unemployment Rate remained at a very strong 3.6% but did not decline to 3.5% as expected.

Note that there are two reports within the Jobs Report and there is a fundamental difference between them. The Business Survey is where the headline job number comes from and it’s based predominately on modeling. The Household Survey, where the Unemployment Rate comes from, is done by actual phone calls to 60,000 homes. The Household Survey also has a job loss or creation component, and it showed there were 353,000 job losses, while the labor force decreased by 363,000, which is why the unemployment rate remained the same.

What’s the bottom line? While the unemployment rate remained stable, it did so for the wrong reasons as it was not due to strong job growth, but rather more people leaving the labor force than job losses. In addition, the report removes people who are not actively searching for a job and there were almost 6 million people that are not being counted that “want a job” but have not looked in the last four weeks.

The U-6 all-in unemployment rate, which adds back all these individuals, increased from 6.9% to 7% and is more indicative of the true unemployment rate. April’s data was also the first tick up we have seen in a long time. Is this an outlier or a sign that things are slowing and we may have seen the low in unemployment? Time will tell.

Private Payrolls Miss Expectations in April 

 adp employment (2)

The ADP Employment Report, which measures private sector payrolls, showed that there were 247,000 jobs created in April, which was weaker than estimates of 400,000. However, job creations for March were revised higher from 455,000 to 479,000, adding 24,000 jobs in that month. Both goods-producing and service-providing sector companies showed gains in April, with services contributing the majority share at 202,000 jobs.

What’s the bottom line? While mid-sized businesses (50-499 employees) gained 46,000 jobs and large businesses (500 or more employees) gained 321,000 jobs, small businesses (1-49 employees) lost  120,000 jobs. This shows that small businesses are having a tough time competing with the wage increases demanded by workers due to the higher costs present in today’s high inflation environment.

Is the Rise in Initial Jobless Claims the Start of a Trend?

 jobless claims (3)

The number of people filing for unemployment benefits for the first time rose by 19,000 in the latest week, as 200,000 Initial Jobless Claims were reported. Continuing Claims, which measure people who continue to receive benefits after their initial claim is filed, fell by 19,000 to 1.38 million. This is the lowest number of Continuing Claims since January 1970.

What’s the bottom line? Unemployment claims are extremely low and the labor market remains tight. But once we start to see claims pick up, especially initial claims, this could be a signal that the economy is slowing. Again, the increase reported last week may just be an outlier, but we have to monitor this data to see if it’s a trend.

Annual Home Price Appreciation Sets a New Record High

CoreLogic released their Home Price Index report for March, showing that home prices rose by 3.3% from February and 20.9% on a year over year basis. This annual reading is an acceleration from 20% in February and the highest reading in the 45-year history of the index!

CoreLogic forecasts that home prices will appreciate 1.2% in April and 5.9% in the year going forward. While this annual figure is finally moving up a bit from the 5% annual forecast in the previous report, it is still much more conservative than most other forecasts and CoreLogic continues to miss forecasts by a large margin. For example, when we look to their report from last year at this time, they forecasted that home prices would increase 3.5% annually, while last week they reported that prices rose nearly 21%.

What’s the bottom line? Even if CoreLogic’s annual forecast is correct and home prices rise nearly 6% over the next year, this level of appreciation is still extremely meaningful for wealth creation. If someone bought a $400,000 home and put 10% down, that means they would gain $24,000 in appreciation over the next year and earn a 60% return on their investment due to leverage.

What to Look for This Week

Inflation data will be the big headliner this week, with April’s Consumer Price Index being reported on Wednesday and the Producer Price Index (which measures wholesale level inflation) coming on Thursday.

Also of note, we’ll get a read on how small businesses are feeling when the National Federation of Independent Business Small Business Optimism Index is reported on Tuesday. The latest Jobless Claims data will be released as usual on Thursday.

Investors will also be closely watching Wednesday’s 10-year Note and Thursday’s 30-year Bond auctions for the level of demand.

Technical Picture

Mortgage Bonds moved lower after Friday’s Jobs Report was released but appear to have found support at 100.79. There is a lot of room to the upside if Bonds can find their footing. The10-Year has broken above the ceiling at 3.08% and has some more room until the next level of resistance at 3.25%.

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