Strike While the Iron is Hot: Mortgage Rates Inch Down

Time is of the Essence! – Buyer’s Market Heating Up

Mortgage rates have been hovering around 6% for a while and would require significant volatility in the overall economic market to change. The mortgage market gurus are currently engaged in a debate about inflation and economic growth, which are both crucial factors affecting rates. The uncertainty surrounding these factors has led to a sideways range in mortgage rates between 6% and 7% since September 2022. The recent small increase in rates was not driven by any specific reason and is part of the overall volatility within the range. Resolving the questions about inflation and economic growth will take weeks or even months, highlighting the complexity of the situation.

We’re currently trading in a narrow trough and which has led to a sideways trend in mortgage rates. This is a welcome departure from the record increases of last year. While inflation remains elevated, its rate of growth has moderated and is expected to decelerate over the remainder of 2023. This should bode well for the trajectory of mortgage rates over the long-term.

The prospect of lower mortgage rates for the remainder of the year is still on the horizon for borrowers who are looking to purchase a home. The stabilization of rates and lack of inventory may create a frenzy for houses in desirable neighborhoods and those that are priced right with the right features. Don’t wait! Looking to get pre-approved? Start here!

Primary Mortgage Market Survey® U.S. weekly averages as of May 11, 2023

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Week of May 8, 2023 in Review

Inflation continues to trend lower. Jobless Claims continue to trend higher. Here are last week’s highlights:

-Annual consumer and producer inflation continue lower

-Jobless Claims continue higher

-Small Business Optimism Hits 10-Year Low

CPI Continues Downward Trend

Consumer inflation rose 0.4% in April per the Consumer Price Index (CPI), with this headline reading coming in-line with estimates. On an annual basis, CPI fell from 5% in March to 4.9% last month. Core CPI, which strips out volatile food and energy prices, increased 0.4% while the annual reading fell from 5.6% to 5.5%.

In addition, the shelter index increased 8.1% over the last year, accounting for 43.2% of the total increase in all items less food and energy per the Bureau of Labor Statistics. However, shelter costs have been declining in more real-time data. For example, Apartment List’s latest Rent Report showed that year-over-year rent growth decelerated to 1.7% in April, the lowest level since March 2021. Once these moderating shelter costs are reflected in the CPI data, they will add additional downside pressure to inflation.

What’s the bottom line? While annual inflation remains elevated at 4.9%, it has declined sharply from the 9.1% peak seen last June. Lower inflation helps both Mortgage Bonds and mortgage rates improve, so these signs of easing inflation are welcome.

PPI Continues Downward Trend

The Producer Price Index (PPI), which measures inflation on the wholesale level, rose 0.2% in April, coming in below expectations of 0.3%. On an annual basis, PPI fell from 2.7% to 2.3%. Core PPI, which strips out volatile food and energy prices, also rose 0.2% with the year-over-year reading dropping from 3.4% to 3.2%.

What’s the bottom line? Annual wholesale inflation readings have made significant improvement as they continue to move lower in the right direction. At its peak last March, PPI was at 11.7% year-over-year and it is now at 2.7%, which is a decline of 9%!

Jobless Claims Continue Lower

 jobless claims 5 11

Initial Jobless Claims rose by 22,000 in the latest week, as 264,000 people filed for unemployment benefits for the first time. This is the highest Initial Jobless Claims print since October 2021. Since October 2022, Initial Jobless Claims have risen by 84,000. While not in a straight line, the trend is higher overall.

Continuing Claims rose by 12,000 to 1,813,000. This number measures people who continue to receive unemployment benefits after their initial claim is filed. Continuing Claims have been rising substantially and remain elevated.

Small Business Optimism Hits 10-Year Low

The National Federation of Independent Business (NFIB) Small Business Optimism Index weakened to 89 in April. This is the lowest level in more than ten years and marked the sixteenth straight month the index has come in below the 49-year average of 98. Among the key takeaways, 24% of small business owners reported that labor quality was their top problem, with inflation a close second at 23%.  

What’s the bottom line? Overall, small business owners are “cynical about future economic conditions,” per NFIB’s chief economist Bill Dunkelberg. The report showed that compensation plans and higher selling prices moderated while the earnings outlook, capital spending plans, and those expecting higher sales all declined. In addition, those expecting a better economy fell to nearly the lowest level on record. This data in totality points to a slowing economy and a recession.

What to Look for This Week

Crucial housing reports are ahead, starting Tuesday with builder confidence for this month from the National Association of Home Builders. April’s Housing Starts and Building Permits will be reported on Wednesday while Existing Home Sales follows on Thursday.

In other news, May’s manufacturing data for the New York and Philadelphia regions will be released on Monday and Thursday, respectively. Look for April’s Retail Sales on Tuesday while the latest Jobless Claims will be reported as usual on Thursday.

Technical Picture

Mortgage Bonds ended the week by breaking beneath the quad level of support and are battling their 50-day moving average.

The 10-year Treasury has broken above its ceiling at 3.43% and is battling its 25-day moving average. If this level fails to keep a lid on yields, we may see a retesting of the 50-day moving average.

What’s the bottom line? Jobless Claims can be volatile from week to week, but they continue to trend higher. The labor market has been extremely tight for quite some time. However, it’s been showing signs of weakening as of late.

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