You may have heard that first time home buyers are getting a break on interest rates! It’s true! To understand how and why, we’ll need to go a little deeper on the topic.
The Federal Housing Finance Agency (FHFA) is the regulator of Fannie Mae and Freddie Mac, which are government-sponsored enterprises (GSEs) that purchase mortgages from lenders. The FHFA sets the loan level pricing adjustments (LLPAs) for loans that are sold to Fannie Mae and Freddie Mac.
The LLPAs are used by Fannie Mae and Freddie Mac to manage the risk of the loans they purchase from lenders and to ensure that they are able to meet their financial obligations. These LLPAs are used by the GSEs to adjust the prices they pay to lenders for mortgages, based on the risk characteristics of the loans.
As you might expect, these LLPAs are typically, in turn, imposed by mortgage lenders. These additional charges are applied to the interest rate of a loan to compensate the lender for the added risk associated with certain loan features, such as a high loan-to-value ratio or a low credit score. This is why we, as mortgage originators, have such hard time answering the question, “What’s your rate?”
Things like a low credit score or a high loan-to-value ratio or the amount of money you want to borrower or whether you are refinancing or purchasing or whether you are buying a condo or a multi-unit property all impact the interest via these LLPAs. These various loan characteristics, in simple terms, are how the banks determine your overall risk profile and that allows them to then quote you an interest rate.
For example, a borrower with a low credit score may be more likely to default on a loan than a borrower with a high credit score. Similarly, a loan with a high loan-to-value ratio (meaning the borrower has a small down payment) may be considered riskier than a loan with a low loan-to-value ratio. Condos are riskier than a single family residence and second homes are riskier than a primary occupancy home. There are other adjusters too!
Having explained all of that, the good news is that the FHFA is removing some of these risk-based price adjustments for first-time home buyers and that means lower interest rates for these very important buyers! There are some rules though and they mostly revolve around income and whether or not you are considered a first-time buyer (spoiler: even if you have purchased a home before, you could still be considered a “first-time buyer”. You just can’t have had a financed property in the last three years).
If you’d like to know more about how these changes impact you or your clients please contact me!
Freddie Mac Primary Mortgage Market Survey as of January 12, 2023
While mortgage rates have resumed their decline, the market remains hypersensitive to rate movements, with purchase demand experiencing large swings relative to small changes in rates. Over the last few weeks latent demand has been on display with buyers jumping in and out of the market as rates move.
The Consumer Price Index (CPI), which measures inflation on the consumer level, showed that inflation decreased by 0.1% in December. On an annual basis, inflation declined from 7.1% to 6.5%. Core CPI, which strips out volatile food and energy prices, rose 0.3%. As a result, year-over-year Core CPI decreased from 6% to 5.7%. All of these figures were in line with estimates.
Of particular note, shelter costs make up 39% of Core CPI and they rose 0.8% in December, meaning they played a big role in the 0.3% monthly gain in Core CPI. However, shelter costs have been lagging in the CPI report, as they have been coming down in more real-time data. Once these moderating shelter costs are reflected in the CPI data, they should add additional downside pressure to inflation.
What’s the bottom line? 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 as they did throughout much of last year.
Since lower inflation typically helps both Mortgage Bonds and mortgage rates improve, these signs of easing inflation are welcome. In fact, if you took the last three monthly CPI readings and averaged them over the next 12 months, the run rate would be 1.6%. Doing the same for Core CPI would give us a run rate of 3.2%. If the lower monthly readings we’ve seen recently continue, they will help us make substantial progress towards the Fed’s 2% inflation target.
Inflation Remains Top Problem for Many Small Businesses
The National Federation of Independent Business (NFIB) Small Business Optimism Index was reported at 89.8 for December. This was the lowest reading since last June and a hair above the weakest since 2013. Among the key takeaways, 32% of small business owners reported that inflation remained their biggest problem, so evidence of cooling inflation is certainly a welcome sign.
What’s the bottom line? Overall, small business owners are not feeling optimistic about the year ahead, per NFIB’s chief economist Bill Dunkelberg. He explained, “Owners are managing several economic uncertainties and persistent inflation and they continue to make business and operational changes to compensate.”
Initial Jobless Claims remained relatively flat in the latest week, as the number of people filing for unemployment benefits for the first time fell by 1,000 to 205,000. Continuing Claims, which measure people who continue to receive benefits after their initial claim is filed, declined 63,000 to 1.634 million.
What’s the bottom line? Even though Continuing Claims fell in the latest week, they have now risen by 270,000 since the beginning of October. Plus, this Continuing Claims data was for the week ending December 31, so it’s possible that the number of claims filed may have been higher if it wasn’t for the holidays. In addition, the Jobs Report for December showed that there was a big spike in both part-time and second jobs, which also could have impacted the number of jobless claims that were filed.
Services Sector Shows Signs of Slowdown
The ISM Services Index, which measures economic activity in the services sector, has now joined its manufacturing brethren in moving below 50 into contraction territory. The index fell to 49.6% in December from 56.5% in November, marking the first reading below 50 since December 2009 (other than the start of the pandemic in the spring of 2020). Among the components of the index, new orders dropped sharply to 45.2%, employment fell into contraction at 49.8% and supplier deliveries eased again to 48.5%.
What’s the bottom line? Survey respondents (which include purchasing and supply executives from non-manufacturing firms) spoke to the challenges they’re facing, with one noting that, “Orders from customers are softening, and some orders are being canceled.” Another explained, “Our company has tightened hiring of new employees month over month, due to uncertainty around the strength of the economy going into 2023.” All in all, the U.S. economy continues to weaken, and this is now spreading into the services sector.
Watching an Important Recession Indicator
The yield spread between the 10-year Treasury and 3-month Treasury has inverted almost 120 basis points. Normally, you would expect to receive a higher rate of return for putting your money away for 10 years versus 3 months. But when there is an economic slowdown and fear in the markets, the yield curve can go inverted – meaning that 3-month yields are higher than 10-year yields, which is backwards or upside down.
What’s the bottom line? Looking back at the history of recessions, we always see an inversion occur ahead of a recession, although the actual recession may not follow immediately. While a recession is not a great thing for the economy, one positive aspect is that periods of recession are always coupled with lower interest rates.
What to Look for This Week
After the market closures Monday in honor of Martin Luther King Jr. Day, this week’s economic calendar includes crucial housing, manufacturing and inflation reports.
On Wednesday, look for the National Association of Home Builders Housing Market Index, which will give us a near real-time read on builder confidence for this month. Housing Starts and Building Permits for December will be reported on Thursday, while December’s Existing Home Sales follows on Friday.
January’s manufacturing data for the New York and Philadelphia regions will provide an important update on that sector when those reports are released on Tuesday and Thursday, respectively.
Also of note, the Producer Price Index for December will give us the latest news on wholesale inflation when it is reported on Wednesday, while Retail Sales data for December will also be released. Plus, the latest Jobless Claims remain important to monitor when that data is released as usual on Thursday.
Technical Picture
Mortgage Bonds tested the very difficult ceiling of resistance at 101.671 but were rejected on Friday. The 10-year tested support at 3.43% but was also rejected and moved higher as a result.
Mortgage application activity sunk to a quarter century low this week as high mortgage rates continue to weaken the housing market. While mortgage market activity has significantly shrunk over the last year, inflationary pressures are easing and should lead to lower mortgage rates in 2023. Homebuyers are waiting for rates to decrease more significantly, and when they do, a strong job market and a large demographic tailwind of Millennial renters will provide support to the purchase market. Moreover, if rates continue to decline, borrowers who purchased in the last year will have opportunities to refinance into lower rates.
The new year kicked off with crucial labor market data, an update on home prices and a warning from the International Monetary Fund:
Slower Wage Growth Data Boosts Bonds
Stronger Than Expected Private Sector Job Growth in December
Jobless Claims Decline But Holidays Likely Skewed Data
Home Prices Still Expected to Appreciate This Year
IMF Issues Recession Warning
Slower Wage Growth Data Boosts Bonds
The Bureau of Labor Statistics (BLS) reported that there were 223,000 jobs created in December, which was stronger than expectations of 200,000 job gains. Revisions to the data from October and November cut 28,000 jobs in those months combined. The unemployment rate declined from 3.6% to 3.5%.
What’s the bottom line? 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 717,000 job creations, which is a pretty big disparity from the headline number of 223,000 job gains.When we look deeper at the numbers, of the 717,000 job creations in the household survey, 679,000 were from part-time workers and 380,000 represent multiple job holders. This means the job creations that were reported could reflect a lot of holiday hires or people getting part-time seasonal work, making the report weaker than the headlines suggest.
In addition, average hourly earnings were up 0.3% in December and 4.6% year over year, which is down from the previous report. Average weekly earnings only rose by 0.2% last month and 3.1% year over year. Average weekly earnings measure actual take-home pay because the data factors in hours worked, which reached the lowest level since 2020. This cut in hours would actually equate to a significant number of jobs lost.
The Stock and Bond markets both reacted positively on Friday to the data on wage growth, as it reflects less wage-pressured inflation, which is what the Fed is looking for.
And the Fed was certainly watching last week’s labor market data closely, as the minutes from their December meeting showed that officials are committed to maintaining a restrictive policy stance until the incoming data provides confidence that inflation is on a sustained path to 2%. Members believe that this is likely to take some time and cautioned, based upon historical experience, against prematurely loosening monetary policy.
Stronger Than Expected Private Sector Job Growth in December
The ADP Employment Report, which measures private sector payrolls, showed that there were 235,000 jobs created in December. This was much stronger than the 150,000 job gains that were expected. While small and medium-sized businesses each added almost 200,000 jobs respectively, large companies with 500 or more employees shed 151,000 jobs.
ADP also reported that annual pay for job stayers increased 7.3% year over year, which is a decline from 7.6% in the previous report. Job changers saw an average increase of 15.2%.
What’s the bottom line? Nela Richardson, chief economist for ADP, said, “The labor market is strong but fragmented, with hiring varying sharply by industry and establishment size. Business segments that hired aggressively in the first half of 2022 have slowed hiring and in some cases cut jobs in the last month of the year.”
Jobless Claims Decline But Holidays Likely Skewed Data
The number of people filing for unemployment benefits for the first time fell by 19,000 in the latest week, as 204,000 Initial Jobless Claims were reported. Continuing Claims, which measure people who continue to receive benefits after their initial claim is filed, declined 24,000 to 1.694 million.
What’s the bottom line? The latest Initial Jobless Claims data was for the week of Christmas, so it’s possible that the number of claims filed may have been higher if it wasn’t for the holidays. Continuing Claims measured the week before Christmas and while they declined in the latest week, they have now risen by 330,000 since the beginning of October. This is another sign of a potential slowdown in the pace of hiring, suggesting it’s becoming harder for many to find a job once they’re let go.
Home Prices Still Expected to Appreciate This Year
CoreLogic released their Home Price Index report for November, showing that home prices fell by 0.2% from October but they were 8.6% higher when compared to November of last year. This annual reading declined from 10.1% in October but is still solid. More importantly, CoreLogic forecasts that home prices will drop 0.1% in December but rise 2.8% in the year going forward.
What’s the bottom line? While CoreLogic has reported slightly negative readings month to month, they still forecast nearly 3% appreciation nationwide over the next year, which can be meaningful for wealth creation. For example, if someone bought a $400,000 home and put 10% down, they would gain $12,000 in appreciation over the next year and earn a 30% return on their investment due to leverage.
IMF Issues Recession Warning
The International Monetary Fund (IMF) issued a recession warning for this year, with Managing Director Kirstalina Georgieva, saying, “We expect one third of the world economy to be in recession.” While the IMF did not include the U.S. in recession, she said that 2023 will be a “tougher” year than 2022 because “the three big economies, US, EU, China, are all slowing down simultaneously.”
If the U.S. does end up in a recession, we will likely have much more than a third of the globe in a recession, as the U.S. makes up a huge part of global GDP.
What to Look for This Week
The National Federation of Independent Business Small Business Optimism Index will show us how small business owners were feeling last month when it is released on Tuesday.
Thursday brings a crucial update on inflation when December’s Consumer Price Index is reported, along with the latest Jobless Claims data.
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 broke above four resistance levels on Friday and ended last week trading in a range between support at the 25-day Moving Average and resistance at the 101.671 Fibonacci level. The 10-year broke beneath a triple floor of support and ended the week trading around 3.56%.
The housing market remains in the doldrums with declining sales, inventory and prices. The declines in sales and deceleration in home prices began swiftly earlier in 2022 but have moderated more recently. While the intensity of weakness is moderating, the market continues to decline and forward leading indicators suggest housing will remain weak throughout the winter.
After the market closures Monday for the Christmas holiday, housing news highlighted last week’s calendar:
Are Signed Contracts on Existing Homes Set to Rebound This Year?
Home Prices Have Softened But Annual Appreciation Is Still Strong
Challenges Remain for Job Seekers, Data Shows
Are Signed Contracts on Existing Homes Set to Rebound This Year?
Pending Home Sales fell 4% from October to November, marking the sixth straight monthly decline. Sales were also 37.8% lower than they were in November of last year. This is a critical report for taking the pulse of the housing market, as it measures signed contracts on existing homes, which represent around 90% of the market.
What’s the bottom line? Lawrence Yun, chief economist for the National Association of Realtors, noted, “Pending home sales recorded the second-lowest monthly reading in 20 years as interest rates, which climbed at one of the fastest paces on record this year, drastically cut into the number of contract signings to buy a home.” However, he explained that there is typically a two months’ lag time between mortgage rates and home sales and “with mortgage rates falling throughout December, home-buying activity should inevitably rebound in the coming months and help economic growth.”
Home Prices Have Softened But Annual Appreciation Is Still Strong
The Case-Shiller Home Price Index, which is considered the “gold standard” for appreciation, showed home prices fell 0.5% in October but they were 9.2% higher when compared to October of last year. This annual reading is a decline from the 10.7% gain reported in September.
The Federal Housing Finance Agency (FHFA) also released their House Price Index, which showed that home prices were flat from September to October but they were 9.8% higher than they were in October of last year. This is a decline from the 11% annual increase reported in September. FHFA’s report measures home price appreciation on single-family homes with conforming loan amounts, which means it most likely represents lower-priced homes. It also differs from Case-Shiller’s data, in that it does not include cash buyers or jumbo loans.
What’s the bottom line? Home prices have been softening, but Case-Siller’s 9.2% annual gain “is in the top quintile of historical performance levels,” per Craig J. Lazzara, Managing Director at S&P DJI. And while home prices are now down 3% from their peak, this is a far cry from a housing crash of 20% that some in the media are predicting.
In addition, Case-Shiller’s 10-city and 20-city Indexes are down 4.6% from their peak, showing that home prices in the major cities are declining a bit more than they are across the nation overall. Note that several of these cities were somewhat overheated and are now giving back a little more price-wise. However, most of the major cities saw less of a price decline in October than they did in September, which could be a sign that markets are slowly improving.
Challenges Remain for Job Seekers, Data Shows
The number of people filing for unemployment benefits for the first time rose by 9,000 in the latest week, as 225,000 Initial Jobless Claims were reported. Continuing Claims, which measure people who continue to receive benefits after their initial claim is filed, saw another large increase of 41,000 to 1.71 million.
What’s the bottom line? Continuing Claims have now risen by 346,000 since the beginning of October, reaching their highest level since early February. This is another sign of a potential slowdown in the pace of hiring, suggesting it’s becoming harder for many to find a job once they’re let go.
What to Look for This Week
After the market closures Monday for the New Year holiday, labor market data will dominate this week’s calendar.
ADP’s new Employment Report will give us an update on private payrolls for December when it is released on Thursday. The latest Jobless Claims data will also be reported on Thursday while Friday brings the Bureau of Labor Statistics Jobs Report for December, which includes Non-farm Payrolls and the Unemployment Rate.
Also of note on Wednesday, December’s ISM Index will provide an important update on the manufacturing sector. Plus, the minutes from the Fed’s latest meeting will be released and these always have the potential to move the markets.
Technical Picture
Mortgage Bonds ended last week battling support at the 50-day Moving Average. If this level is broken, the next floor is at the 99.845 Fibonacci level. The 10-year tested the 3.908% Fibonacci level but was rejected. This Friday’s BLS Jobs Report could be the catalyst to spark a rally in Bonds.
The 30-Year Fixed-Rate Mortgage Continues to Trend Down
December 22, 2022
Heading into the holidays, mortgage rates continued to move down. Rates have declined significantly over the past six weeks, which is helpful for potential homebuyers, but new data indicates homeowners are hesitant to list their homes. Many of those homeowners are carefully weighing their options as more than two-thirds of current homeowners have a fixed mortgage rate of below four percent.
The markets had plenty of news to feast on last week, including the latest data on consumer inflation, home sales and home construction. Here are the highlights:
-Consumer Inflation Headed in Right Direction
-Inventory of Existing Homes Declined for Fourth Consecutive Month
-New Home Sales Beat Expectations in November
-What the Home Construction Slowdown Means for Home Prices
-Home Builder Confidence Declined Every Month This Year
-Unemployment Claims Data Illustrates Difficulties for Job Seekers
-Third Quarter GDP Remains Positive
Consumer Inflation Headed in Right Direction
The Fed’s favorite measure of inflation, Personal Consumption Expenditures (PCE), showed that headline inflation rose 0.1% in November. The year-over-year reading for November declined from 6.1% to 5.5% and while this is a nice decline, it does factor in an upside revision to October’s data. Core PCE, which strips out volatile food and energy prices, rose by 0.2% with the year-over-year change falling from 5% to 4.7%.
What’s the bottom line? Inflation is heading in the right direction and there is hope that inflationary pressures will continue to ease. This is because inflation is calculated on a rolling 12-month basis, which means that the total of the past 12 monthly inflation readings will give us the year-over-year rate of inflation. Inflation readings after November of last year are higher comparisons, so if we continue to see lower monthly readings, the annual rate of inflation will continue to move lower.
Inventory of Existing Homes Declined for Fourth Consecutive Month
Existing Home Sales fell 7.7% from October to November to a 4.09 million unit annualized pace, per the National Association of Realtors (NAR). This was weaker than expectations looking for a 6% decline. Sales were also 35.4% lower when compared to November of last year. This is a critical report for taking the pulse of the housing market, as it measures closings on existing homes, which represent around 90% of the market.
What’s the bottom line? The rise in inventory that occurs every summer from parents listing their homes so their kids are settled for the new school year has clearly crested. Inventory has declined steadily over the last four months, from 1.31 million homes available for sale at the end of July to 1.14 million homes at the end of November. This equates to a tight 3.3 months’ supply of homes.
But inventory is even tighter than that figure implies, as there were only 752,000 “active listings” in November, meaning that 34% of the “inventory” in the Existing Home Sales report is under contract and not truly available. Even though sales have declined, this data also speaks to ongoing demand for homes, as a normal market has 25% of inventory under contract.
And while there are reports that homes are sitting longer on the market, they are still selling quickly when priced correctly, which is also reflective of demand. Average days on the market increased slightly from 21 days in October to 24 days in November, while 61% of homes sold last month were on the market for less than a month.
To summarize, low inventory and ongoing housing demand will continue to limit the downside in home prices.
New Homes Sales Beat Expectations in November
New Home Sales, which measure signed contracts on new homes, rose 5.8% in November to a 640,000-unit annualized pace, coming in much stronger than the 4.7% decline that was expected. There was a negative revision to October’s sales that made November’s gain appear a bit bigger, but even when factoring this in sales were up 1.3%.
The median home price for new homes was $471,200 but remember this is not the same as appreciation. It simply means half the homes sold were above that price and half were below it, and this figure can be skewed by the mix of sales.
What’s the bottom line? These sales figures were from November when rates were higher, so contract signings may continue to pick up. And while sales are now down 15.3% from November of last year, this year’s figure is not so bad considering higher rates, inflation and tight inventory.
Speaking of inventory, there were 461,000 new homes for sale at the end of November, which equates to an 8.6 months’ supply. However, only 64,000 were actually completed, with the rest either not started or under construction. The number of completed homes equates to a 1.7 months’ supply, well below a balanced market.
What the Home Construction Slowdown Means for Home Prices
Housing Starts, which measure the start of construction on homes, fell 0.5% from October to November. Starts for single-family homes, which are the most important because they are in such high demand among buyers, declined 4.1% from October and 32.1% from November of last year. Building Permits for single-family homes, which are indicative of future supply, also fell 7.1% for the month and 29.7% year over year.
What’s the bottom line? There is a big difference between housing the economic driver and housing the investment. Clearly activity has slowed but the low supply environment in new homes (and in existing homes as noted above) will continue to be supportive of prices. This is a stark contrast to the housing crash where demand was lower, but builders were putting up a record number of homes.
Home Builder Confidence Declined Every Month This Year
The National Association of Home Builders (NAHB) Housing Market Index, which is a near real-time read on builder confidence, fell 2 points to 31 in December. Among the components of the index, current sales conditions fell 3 points to 36, buyer traffic remained at a very low 20 and sales expectations for the next six months rose four points to 35.
What’s the bottom line? Any reading above 50 on this index, which runs from 0 to 100, signals expansion while readings below 50 signal contraction. This month’s confidence reading is the lowest since mid-2012 (except for the onset of the pandemic in the spring of 2020), which is unsurprising given that construction costs remain elevated while higher interest rates have caused many homebuyers to pause their search.
However, NAHB chief economist Robert Dietz, noted that December marked the first time since April that “builders registered an increase in future sales expectations.” He added, “The silver lining in this HMI report is that it is the smallest drop in the index in the past six months, indicating that we are possibly nearing the bottom of the cycle for builder sentiment.”
Unemployment Claims Data Illustrates Difficulties for Job Seekers
Initial Jobless Claims rose by 2,000 in the latest week, as 216,000 people filed for unemployment benefits for the first time. Continuing Claims, which measure people who continue to receive benefits after their initial claim is filed, fell 6,000 to 1.672 million, though the prior week’s report was revised higher by 7,000.
What’s the bottom line? Continuing Claims have now risen by 308,000 since the beginning of October. This is another sign of a potential slowdown in the pace of hiring, suggesting it’s becoming harder for many to find a job once they’re let go.
Third Quarter GDP Remains Positive
The final reading of third quarter Gross Domestic Product (GDP) showed that the U.S. economy grew by 3.2%. This is an upward revision from the first and second readings and also better than the 2.9% expected. GDP functions as a scorecard for the country’s economic health, so the positive reading in the third quarter is a welcome sign after two consecutive negative GDP readings in the first and second quarters of this year.
What to Look for This Week
After the market closures Monday for the Christmas holiday, housing news will highlight this week’s calendar. On Tuesday, look for home price appreciation data for October from the Case-Shiller Home Price Index and the Federal Housing Finance Agency (FHFA) House Price Index. November’s Pending Home Sales will be delivered on Wednesday.
Also of note, the latest Jobless Claims remain important to monitor when they are released as usual on Thursday.
Technical Picture
Mortgage Bonds ended last week continuing to battle the dual floor of support at the 100-day Moving Average and 100.758 Fibonacci level. The 10-year moved higher on Friday, ending the week trading in a range between support at 3.65% (which is a Fibonacci level) and overhead resistance at the 50-day Moving Average.
Primary Mortgage Market Survey® for December 15, 2022
Mortgage rates continued their downward trajectory this week, as softer inflation data and a modest shift in the Federal Reserve’s monetary policy reverberated through the economy. The good news for the housing market is that recent declines in rates have led to a stabilization in purchase demand. The bad news is that demand remains very weak in the face of affordability hurdles that are still quite high.
Consumer inflation continues to cool, while there were some important takeaways from the Fed’s latest rate hike decision. Read on for these crucial details:
What the Fed’s Latest Rate Hike Really Signals
As expected, the Fed hiked its benchmark Fed Funds Rate by 50 basis points at its meeting last Wednesday. This was the Fed’s seventh rate hike of the year though it was a slower pace after four consecutive 75 basis point hikes at their meetings in June, July, September and November. The Fed Funds Rate is the interest rate for overnight borrowing for banks and it is not the same as mortgage rates. When the Fed hikes the Fed Funds Rate, they are trying to slow the economy and curb inflation.
What’s the bottom line? In their statement after the meeting, the Fed said that ongoing increases to the Fed Funds Rate would be appropriate and that they would continue their balance sheet reduction. The surprise was in the Fed Funds Rate outlook, where 17 of 19 members forecasted a Fed Funds Rate of over 5%. The projected terminal rate, or the highest the Fed Funds Rate will go in the cycle, increased by 50 basis points to 5.1% from 4.6%.
While the markets initially reacted negatively to this news because it signaled that the Fed intended to keep rates higher for longer than anticipated, sentiment shifted during Fed Chair Jerome Powell’s press conference. He acknowledged that, “The inflation data received so far for October and November show a welcome reduction in the monthly pace of price increases.”
Powell went on to telegraph a 25 basis point hike at the Fed’s next meeting on February 1. This continual slowing in the pace of hikes was considered a positive sign, as it signaled to the markets that inflation is getting under control.
Consumer Inflation Cooler Than Expected Last Month
The Consumer Price Index (CPI), which measures inflation on the consumer level, showed that inflation increased by 0.1% in November, coming in lower than estimates. On an annual basis, inflation declined from 7.7% to 7.1%, which was much cooler than the 7.3% expected. Core CPI, which strips out volatile food and energy prices, also came in softer than forecasted with a 0.2% rise. As a result, year-over-year Core CPI decreased from 6.3% to 6%, which again was lower than estimates.
Of particular note, shelter costs make up 39% of Core CPI and they rose 0.6% in November, meaning they played a big role in the 0.2% monthly gain in Core CPI. However, shelter costs have been lagging in the CPI report.
In more real-time data, we are seeing a moderation in rental prices. For example, Apartment List’s National Rent Report showed that rents were up 4.7% from January through November of this year, well below the 18% rise reported this time last year. These moderating shelter costs should be reflected in the CPI data hopefully by January, which should add additional downside pressure to inflation.
What’s the bottom line? 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 as we’ve seen this year.
When we look at how inflation is calculated, there is hope that it will continue to move lower next year. CPI is a rolling twelve-month report. If we add the previous 12 monthly readings and account for rounding and compounding, we come up with the year-over-year figure. For example, when the data for November 2022 was released last week (0.2% for Core CPI), it replaced the data for November 2021 (0.5%) in the calculation of annual inflation.
Going forward, the inflation readings that will be replaced are high, so if we see lower monthly readings like we did in November’s report, the annual rate of inflation will continue to move lower. Again, lower inflation typically helps both Mortgage Bonds and mortgage rates improve.
Small Business Owners Say Inflation Remains Top Problem
The National Federation of Independent Business (NFIB) Small Business Optimism Index was reported at 91.9 for November. While this was a slight improvement from October, this is the eleventh straight month the index has come in well below the 49-year average of 98. Among the key takeaways, 32% of small business owners reported that inflation remained their biggest problem, so evidence of cooling inflation is certainly a welcome sign.
What’s the bottom line? Bill Dunkelberg, NFIB’s chief economist, noted that, “Going into the holiday season, small business owners are seeing a slight ease in inflation pressures, but prices remain high.” He added, “The small business economy is recovering as owners manage an ongoing labor shortage, supply chain disruptions, and historic inflation.”
Shipping Data Brings Positive Sign for Inflation Picture
The expenditures component of the Cass Freight Index, which measures the total amount spent on freight across the country, rose 1.8% in November. However, on a year-over-year basis the expenditures component decelerated from +21% in September to +11.1% in October to now +4.7% in November.
What’s the bottom line? The Cass Freight Index is a monthly measure of the North American freight market and it provides valuable insight into supply chain indicators and the overall economy. The latest data shows that the supply and demand imbalance in trucking markets has loosened significantly this year. As a result, freight rates are leveling off and set to soften further in the months to come. Shippers are starting to see real savings and considerable cost relief is now likely for 2023, which is positive news for the inflation picture.
Continuing Jobless Claims at Highest Level Since February
The number of people filing for unemployment benefits for the first time fell by 20,000 in the latest week, as 211,000 Initial Jobless Claims were reported. This is the lowest level of first-time filers since September. Continuing Claims, which measure people who continue to receive benefits after their initial claim is filed, rose 1,000 to 1.671 million.
What’s the bottom line? Continuing Claims have now risen by 307,000 since the beginning of October to their highest level since February. This points to a potential slowdown in the pace of hiring, suggesting it’s becoming harder for many to find a job once they’re let go.
What to Look for This Week
The markets have plenty of news to feast on this week, beginning Monday with the National Association of Home Builders Housing Market Index, which will give us a near real-time read on builder confidence for this month. Housing Starts and Building Permits for November will be reported on Tuesday, while November’s Existing Home Sales and New Home Sales follow on Wednesday and Friday, respectively.
On Thursday, the latest Jobless Claims remain important to monitor, as does the final reading for third quarter GDP.
Ending the week, crucial inflation numbers for November will be reported Friday via the Fed’s favored measure, Personal Consumption Expenditures.
Technical Picture
Mortgage Bonds ended last week still trading in the middle of a wide range with a triple floor of support formed by the 25-day Moving Average, 100-day Moving Average and 100.758 Fibonacci level. The 10-year is battling with an important ceiling at the 100-day Moving Average and falling trendline that has been intact since late October. If this level is broken, there is a lot of room to the upside before reaching the next ceiling at 3.644%.
Primary Mortgage Market Survey for December 8, 2022
Mortgage rates decreased for the fourth consecutive week, due to increasing concerns over lackluster economic growth. Over the last four weeks, mortgage rates have declined three quarters of a point, the largest decline since 2008. While the decline in rates has been large, homebuyer sentiment remains low with no major positive reaction in purchase demand to these lower rates.
Reports on home prices, inflation and unemployment highlighted a relatively quiet economic calendar, while recession signals continue flashing. Read on for these crucial stories:
Wholesale Inflation Hotter Than Anticipated
The Producer Price Index (PPI), which measures inflation on the wholesale level, rose by a higher than expected 0.3% in November. On a year-over-year basis, PPI decreased from an upwardly revised 8.1% to 7.4%. While this was also a little higher than expected, 0.7% still represents a meaningful decline. Core PPI, which strips out volatile food and energy prices, was also hotter than expected but the annual figure decreased from 6.7 to 6.2%.
What’s the bottom line? Even though wholesale inflation was hotter than expected last month, the annual readings are still moving lower in the right direction. In addition, year-over-year consumer inflation is also expected to show a decline when November’s Consumer Price Index is reported this week, which would be good news.
Besides causing higher prices, 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 as we’ve seen this year.
Are Home Prices Still Forecasted to Appreciate?
CoreLogic released their Home Price Index report for October, showing that home prices declined by 0.1% from September but they were 10.1% higher when compared to October of last year. This annual reading declined from 11.4% in September but is still solid. More importantly, CoreLogic forecasts that home prices will remain flat in November and rise 4.1% in the year going forward, which is an increase from 3.9% in the previous report.
What’s the bottom line? CoreLogic’s latest annual forecast is important to note because 4% appreciation can still be meaningful for wealth creation. For example, if someone bought a $400,000 home and put 10% down, that means they would gain $16,000 in appreciation over the next year and earn a 40% return on their investment due to leverage.
Continuing Jobless Claims Reach a 10-Month High
The number of people filing for unemployment benefits for the first time rose by 4,000 in the latest week, as 230,000 Initial Jobless Claims were reported. Continuing Claims, which measure people who continue to receive benefits after their initial claim is filed, saw another large increase of 62,000 to 1.671 million.
What’s the bottom line? Initial Jobless Claims represent a new crop of people filing for unemployment benefits and the data suggests it’s becoming harder for many to find a job once they’re let go. This is evidenced by Continuing Claims, which have now risen by 307,000 since the beginning of October to their highest level since February.
More Recession Signals Flashing
We are seeing more inversions on the yield curve, including 2-year yields moving higher than 10-year yields last week to reach the deepest inversion since 1981. We have also seen 3-month and 1-year yields move higher than 10-year yields. This is unusual as typically you would expect to receive a higher rate of return if you put your money away for 10 years when compared to lesser timeframes. An upside-down yield curve has been a historically accurate recession indicator, as it is a symptom that the economy is slowing.
Meanwhile, recession signals are flashing in other areas of the economy, including in the manufacturing sector. The Chicago PMI, which measures activity in that region, plummeted to 37.2 in November, below estimates and well into contraction territory which is seen when readings fall below 50.
Another sign that things are slowing has come via Business Roundtable’s fourth quarter CEO Economic Outlook Survey, which showed that hiring plans fell 17 points to 61.
Business Roundtable noted that the “results reflect a softening economy that has tempered CEO plans and expectations for the next six months. The results signal CEOs remain cautious amid persistent domestic and global economic headwinds, including high inflation and the Fed measures required to tame it.”
Lastly, the Philadelphia Federal Reserve does a quarterly survey asking “professional forecasters” the probability of a recession in the next four quarters. It is now almost twice what it was prior to the Great Recession. Professional forecasters tilt to the bullish side of the optimism street. When 43% of them think a recession is likely within the next year, we should pay attention.
What to Look for This Week
The Fed’s two-day meeting begins Tuesday, with the Monetary Policy Statement and press conference coming on Wednesday. The Fed is expected to again hike its benchmark Fed Funds Rate to help cool inflation and the Fed will see the latest data on consumer inflation when the Consumer Price Index for November is released ahead of its meeting on Tuesday. Investors will be closely watching their actions and commentary.
Also on Tuesday, the National Federation of Independent Business Small Business Optimism Index will show us how small business owners were feeling last month.
Thursday brings November’s Retail Sales data and the latest Jobless Claims. Plus, December’s manufacturing data for the New York and Philadelphia regions will provide an important update on that sector.
Investors will also be closely watching Monday’s 10-year Note and Tuesday’s 30-year Bond auctions for the level of demand.
Technical Picture
Mortgage Bonds broke beneath their 100-day Moving Average on Friday, which is a negative. However, there is support not too far beneath present levels at the 100.53 Fibonacci level and some potentially Bond-friendly news is ahead this week.
Mortgage rates continued to tick down heading into the Thanksgiving holiday. In recent weeks, rates have hit above seven percent only to drop by almost half a percentage point. This volatility is making it difficult for potential homebuyers to know when to get into the market, and that is reflected in the latest data which shows existing home sales slowing across all price points.
With reports on housing, jobs, inflation and Fed chatter, the markets had plenty to digest last week. Here are the highlights:
Big Jobs Number or Grand Illusion
The Bureau of Labor Statistics (BLS) reported that there were 263,000 jobs created in November, which was stronger than expectations of 200,000 job gains. Revisions to the data from September and October cut 23,000 jobs in those months combined. The unemployment rate held steady at 3.7%.
What’s the bottom line? While the headline job growth number appears strong, this figure is not what it seems.
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 138,000 job losses, which is a pretty big disparity from the headline number of 263,000 job gains. The Household Survey also showed that the labor force decreased by 186,000. As a result, the unemployment rate remained the same – but for the wrong reasons. It was not due to strong job growth, but rather more people leaving the labor force than job losses.
Private Sector Job Growth at Slowest Pace Since January 2021
The ADP Employment Report, which measures private sector payrolls, showed that there were 127,000 jobs created in November. This was weaker than the 200,000 job gains that were expected and almost half the amount reported in October. Declines were seen in some of the more interest rate-sensitive sectors like construction and manufacturing, while leisure and hospitality and healthcare were bright spots.
ADP also reported that pay growth “remained elevated even as it continued a modest but broad-based deceleration.” Annual pay for job stayers increased 7.6% year over year, while job changers saw an average increase of 15.1%, which is down for the fifth consecutive month.
What’s the bottom line? Nela Richardson, chief economist for ADP, said, “Turning points can be hard to capture in the labor market, but our data suggest that Federal Reserve tightening is having an impact on job creation and pay gains. In addition, companies are no longer in hyper-replacement mode. Fewer people are quitting and the post-pandemic recovery is stabilizing.”
Continuing Jobless Claims at Highest Level Since February
The number of people filing for unemployment benefits for the first time fell by 16,000 in the latest week, as 225,000 Initial Jobless Claims were reported. Continuing Claims, which measure people who continue to receive benefits after their initial claim is filed, saw a substantial jump of 57,000 to 1.608 million.
What’s the bottom line? The latest Initial Jobless Claims data was for the week of Thanksgiving, so it’s likely the number of claims filed may have been higher if it wasn’t for the holiday. Continuing Claims data measured the week before Thanksgiving, so they were unaffected by the holiday. Continuing Claims have now risen by more than 244,000 since the beginning of October and have reached their highest level since February, suggesting that it’s becoming harder for people to find a job once they’re let go.
Bonds Boosted by Fed Chair Powell and Cooler Inflation
The Fed’s favorite measure of inflation, Personal Consumption Expenditures (PCE), showed that headline inflation rose 0.3% in October, which was in line with estimates. The year over year reading declined from 6.3% to 6% and is down from the peak of 7% seen in June. Core PCE, which strips out volatile food and energy prices, rose by 0.2% with the year-over-year change falling from 5.2% to 5%, down from the peak of 5.4% in February.
What’s the bottom line? Inflation is heading in the right direction and there is hope that inflationary pressures will continue to ease. This is because inflation is calculated on a rolling 12-month basis, which means that the total of the past 12 monthly inflation readings will give us the year-over-year rate of inflation. Inflation readings after October of last year are higher comparisons, so if we continue to see lower monthly readings, the annual rate of inflation will continue to move lower.
On a related note, Fed Chair Jerome Powell’s remarks last week sparked a rally in the markets, as he said that smaller hikes to the Fed’s benchmark Fed Funds Rate could start as soon as their December 13-14 meeting. The Fed Funds Rate is the interest rate for overnight borrowing for banks and it is not the same as mortgage rates. When the Fed hikes the Fed Funds Rate, they are trying to slow the economy and curb inflation.
Powell’s less hawkish tone sets up a potential 50 basis point hike at next week’s meeting, which would mark their seventh rate hike of the year, including four consecutive aggressive 75 basis point hikes at their meetings in June, July, September and November.
Why Signed Contracts on Existing Homes Are Set to Rebound
Pending Home Sales fell 4.6% from September to October, marking the fifth straight monthly decline. Sales were also 37% lower than they were in October of last year. This is a critical report for taking the pulse of the housing market, as it measures signed contracts on existing homes, which represent around 90% of the market.
What’s the bottom line? Lawrence Yun, chief economist for the National Association of Realtors, noted, “October was a difficult month for home buyers as they faced 20-year-high mortgage rates.” Yet, he added that “upcoming months should see a return of buyers, as mortgage rates appear to have already peaked and have been coming down since mid-November.”
What the Latest Home Price Appreciation Data Really Means
The Case-Shiller Home Price Index, which is considered the “gold standard” for appreciation, showed home prices fell 1% in September but they were 10.6% higher when compared to September of last year. This annual reading is a decline from the 12.9% gain reported in August but still strong.
The Federal Housing Finance Agency (FHFA) also released their House Price Index. This report measures home price appreciation on single-family homes with conforming loan amounts, which means it most likely represents lower-priced homes. Home prices rose 0.1% from August to September and they were up 11% from September of last year. This is a decline from the 11.9% annual increase reported in August, but again still solid on an annual basis.
What’s the bottom line? Case-Shiller’s 10-city and 20-city Indexes were down 1.4% and 1.5% respectively, meaning that a lot of the losses were concentrated in the bigger cities that were somewhat overheated, including Seattle (-2.9%), San Francisco (-2.9), San Diego (-2.1%), Denver (-2.0%) and Los Angeles (-1.8%). Note that the decreases were milder than the previous report.
Further softness in home prices is possible in the next several Case-Shiller reports as the full impact of peak rates was not realized in September. And while home prices are now down 2.5% from their peak, this is a far cry from a housing crash of 20% that some in the media are predicting.
Third Quarter GDP Remains Positive
The second reading of third quarter Gross Domestic Product (GDP) showed that the U.S. economy grew by 2.9%. This is an upward revision from the first reading of 2.6% and also better than the 2.7% expected. Note that significant revisions are still possible when the final reading for the third quarter is released on December 22.
What’s the bottom line? GDP functions as a scorecard for the country’s economic health, so the positive reading in the third quarter is a welcome sign after two consecutive negative GDP readings in the first and second quarters of this year.
What to Look for This Week
This week’s economic calendar is relatively quiet but highlighted by the latest Jobless Claims data on Thursday and the Producer Price Index on Friday, which will give us an update on wholesale inflation for last month.
Technical Picture
After the stronger than expected Jobs Report was released Friday morning, Mortgage Bonds initially gave back some of the gains they had made earlier in the week. Yet they were able to recover their losses later on Friday after testing their 100-day Moving Average. The next celling is all the way up at 102.788. The 10-year tested overhead resistance at 3.57% and was rejected. The next floor is at their 100-day Moving Average.
Mortgage rates continued to tick down heading into the Thanksgiving holiday. In recent weeks, rates have hit above seven percent only to drop by almost half a percentage point. This volatility is making it difficult for potential homebuyers to know when to get into the market, and that is reflected in the latest data which shows existing home sales slowing across all price points.
A smorgasbord of news was released ahead of Thanksgiving, including an update on new home sales, jobless claims, the Fed and recession chatter. Read on for these stories:
New Home Sales Better Than Expected in October
Initial Jobless Claims Hit a Three-Month High
Will the Fed Slow Its Pace of Rate Hikes?
Should Strong Retail Sales Quiet Recession Chatter?
New Homes Sales Better Than Expected in October
New Home Sales, which measure signed contracts on new homes, rose 7.5% in October to a 632,000-unit annualized pace, coming in much better than the 5.5% decline that was expected. There was a negative revision to September’s sales that made October’s gain appear a bit bigger, but even when factoring this in sales were up 5.5%.
The median home price for new homes was $493,000, which was an increase from September, but remember this is not the same as appreciation. It simply means half the homes sold were above that price and half were below it, and this figure can be skewed by the mix of sales. Last month, there was a big uptick in sales of homes in the $500,000 and over segments.
What’s the bottom line? These sales figures were from October when rates were half a percent higher, so contract signings may continue to pick up. And while sales are now down 5.8% from October of last year, this year’s figure is not so bad considering higher rates, inflation and tight inventory.
Speaking of inventory, there were 470,000 new homes for sale at the end of October, which equates to an 8.9 months’ supply. However, only 61,000 or 13% were actually completed, with the rest either not started or under construction. The amount of completed homes equates to a 1.2 months’ supply, well below a balanced market.
Initial Jobless Claims Hit a Three-Month High
The number of people filing for unemployment benefits for the first time rose by 17,000 in the latest week, as 240,000 Initial Jobless Claims were reported. Continuing Claims, which measure people who continue to receive benefits after their initial claim is filed, also saw a substantial jump of 48,000 to 1.551 million.
What’s the bottom line? The latest week’s Initial Jobless Claims was the largest amount since August and also a sizeable increase from the previous week, which likely reflects some of the large layoffs that have been reported in the news. Continuing Claims have also risen by 187,000 since the beginning of October and this suggests that it’s becoming harder for people to find a job once they’re let go. The continued increase in unemployment claims may mean the labor market is not as strong as reports have indicated and could signal that a rise in the unemployment rate is ahead.
Will the Fed Slow Its Pace of Rate Hikes?
The minutes from the Fed’s November meeting showed that Fed members feel ongoing hikes to their benchmark Fed Funds Rate would be appropriate but a substantial majority support slowing the pace of hikes soon. This sets up a potential 50 basis point hike at their meeting on December 13-14, which would mark their seventh rate hike of the year, including four consecutive aggressive 75 basis point hikes at their meetings in June, July, September and November.
The Fed Funds Rate is the interest rate for overnight borrowing for banks and it is not the same as mortgage rates. When the Fed hikes the Fed Funds Rate, they are trying to slow the economy and curb inflation. The minutes also showed that many Fed members said that the effects of the rate hikes were still quite uncertain. But of note, the Consumer and Producer Price Indexes released after the Fed’s meeting showed that inflation was cooler than expected in October.
Should Strong Retail Sales Quiet Recession Chatter?
Recent news stories have questioned whether the United States will hit a recession, pointing to strong Retail Sales data for October which showed that consumers remained resilient and continued to spend despite inflation. Retail Sales were up 1.3% last month, which was stronger than estimates of 1%.
What’s the bottom line? The strength in Retail Sales may be more of an illusion, as additional data suggests some consumers are using credit cards and their savings for some of this spending. Credit card debt has risen 15% over the last year, which is the largest jump since the 2001 recession, while the nation’s savings rate has dropped to 3%, well below the pre-pandemic level of 7.8% in January 2020 and the lowest level since the 2008 to 2009 recession.
Meanwhile, recession signals are flashing in other areas of the economy, including in the manufacturing sector, shipping and especially yield curve inversions. Under normal circumstances, shorter-term maturities offer lower yields than their longer-term counterparts due to the shorter time commitment of tying up your investment. However, there are occasions where shorter-term maturities offer a yield that may be higher than longer-term maturities, which is called an inverted yield curve.
Recently, yields on the longest maturity Bond (the 30-year) and the shortest maturity Treasury (the 1-month) inverted. The last two times this happened, a recession followed shortly thereafter. In addition, we have seen other inversions in recent months, including 1-year and 2-year yields moving higher than 10-year yields. An inverted yield curve has been a historically accurate recession indicator, as it is a symptom that the economy is slowing.
What to Look for This Week
Housing, inflation and labor market reports highlight a full week of economic data.
On Tuesday, look for home price appreciation data for September from the Case-Shiller Home Price Index and the Federal Housing Finance Agency (FHFA) House Price Index. September’s Pending Home Sales will be delivered on Wednesday.
Wednesday also brings the second estimate for third quarter GDP while crucial inflation numbers for October will be reported Thursday from the Fed’s favored measure, Personal Consumption Expenditures.
From the labor sector, ADP’s new Employment Report will give us an update on private payrolls for November when it is released on Wednesday. The latest Jobless Claims data will be reported on Thursday while Friday brings the Bureau of Labor Statistics Jobs Report for November, which includes Non-farm Payrolls and the Unemployment Rate.
Technical Picture
Mortgage Bonds tested and held support at the 100.534 Fibonacci level. If this level is maintained, Bonds have room to move higher until reaching the 100-day Moving Average. The 10-year was unable to break beneath the floor at 3.67% and ended last week trading at around 3.69%.
Primary Mortgage Market Survey for November 17, 2022
Mortgage rates tumbled this week due to incoming data that suggests inflation may have peaked. While the decline in mortgage rates is welcome news, there is still a long road ahead for the housing market. Inflation remains elevated, the Federal Reserve is likely to keep interest rates high and consumers will continue to feel the impact.
Over the last fifty years, Freddie Mac has closely monitored the trajectory of mortgage rates. This week we are launching enhancements to our Primary Mortgage Market Survey® methodology that will increase its accuracy and reliability. This new approach will incorporate more detailed data and monitor real-time mortgage rates more closely.
Home sales and home construction cooled in October, while wholesale inflation data gave Bonds a boost. Here are the key headlines.
Low Housing Inventory Remains Supportive of Home Prices
Existing Home Sales fell 5.9% from September to October to a 4.43 million unit annualized pace, per the National Association of Realtors (NAR). This was slightly stronger than expectations looking for a 7% decline. Sales were also 28.4% lower when compared to October of last year. This is a critical report for taking the pulse of the housing market, as it measures closings on existing homes, which represent around 90% of the market.
What’s the bottom line? While activity has slowed in the housing market, home prices are still being supported by continued low inventory. Plus, the rise in inventory that occurs every summer from parents listing their homes so their kids are settled for the new school year has crested.
The number of available homes declined for the third month in a row, from 1.25 million at the end of September to 1.22 million at the end of October. This equates to a 3.3 months’ supply of homes.
However, there were only 754,000 “active listings” in October, which means that 38% of the “inventory” in the Existing Home Sales report is under contract and not truly available. This speaks to demand, as a normal market has 25% of inventory under contract. When looking at the month’s supply of available homes for sale, it’s really 2.5 months.
And while there are reports that homes are sitting longer on the market, they are still selling quickly when priced correctly. Average days on market increased slightly from 19 days in September to 21 days in October, while 64% of homes were on the market for less than 30 days.
Construction of Homes Continues to Slow
Fall brought a chill to homebuilding as Housing Starts, which measure the start of construction on homes, fell 4.2% from September to October. Starts for single-family homes, which are the most important because they are in such high demand among buyers, declined 6.1% from September and 20.8% from October of last year. Building Permits for single-family homes, which are indicative of future supply, also fell 3.6% for the month and 22.1% year over year.
What’s the bottom line? Builders have clearly slowed down production and it appears they have learned their lesson from 2006 and 2007, when they kept building homes despite waning demand. This means the supply and demand dynamics that we are seeing today are the exact opposite of what we saw in 2007 when there was a crash. While we are certainly seeing an activity recession in housing, low inventory should continue to be supportive of home prices.
Builder Confidence Drops for Eleventh Consecutive Month
The National Association of Home Builders (NAHB) Housing Market Index, which is a near real-time read on builder confidence, fell 5 points to 33 in November. All components of the index moved lower, with current sales conditions falling six points to 39, sales expectations for the next six months declining four points to 31 and buyer traffic dropping five points to 20.
What’s the bottom line? Any reading above 50 on this index, which runs from 0 to 100, signals expansion while readings below 50 signal contraction. This month’s confidence reading is the lowest since June 2012 (except for the start of the pandemic in the spring of 2020), which is unsurprising given that building material costs remain elevated while higher interest rates have caused many homebuyers to pause their search.
The NAHB also noted that 59% of builders reported using incentives to help increase buyer traffic, with “a big increase in usage from September to November.” For example, 25% of builders said they are paying points for buyers in November as compared to 13% in September. Mortgage rate buy-downs rose from 19% to 27% over the same time period, while 37% of builders cut prices in November versus just 26% in September.
Wholesale Inflation Cooler Than Estimated
The Producer Price Index (PPI), which measures inflation on the wholesale level, rose by 0.2%, which was half of what economists had expected. On a year-over-year basis, PPI decreased from 8.4% to 8%. Core PPI, which strips out volatile food and energy prices, was flat in October while the annual figure decreased from 7.2% to 6.7%. All of these readings were cooler than expected.
What’s the bottom line? Besides causing higher prices, 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 as we’ve seen this year. The Bond market reacted favorably to this cooler inflation report when it was released last Tuesday.
Continuing Jobless Claims Continue to Creep Higher
Initial Jobless Claims fell by 4,000 in the latest week, as 222,000 people filed for unemployment for the first time. Continuing Claims, which measure people who continue to receive benefits after their initial claim is filed, rose 13,000 to 1.507 million.
What’s the bottom line? Initial Jobless Claims are still relatively low, as employers continue to hold on to workers. However, Continuing Claims remain the real story as they have risen by 143,000 since the beginning of October. This reflects a slower pace of hiring and could suggest that it’s becoming harder for people to find a job once they’re let go. Given the headlines of large companies issuing layoffs, it’s possible Continuing Claims could continue to increase, and the labor market may not be as strong as reports have indicated.
What to Look for This Week
The markets will gobble up a heap of economic news on Wednesday ahead of the Thanksgiving holiday. Key reports include New Home Sales and Durable Goods for October and the latest Jobless Claims figures. Plus, the minutes from the Fed’s latest meeting will also be released and these always have the potential to move the markets.
Technical Picture
Mortgage Bonds ended last week battling a ceiling of resistance at the important 100.534 Fibonacci level for the sixth day in a row. Bonds do have support at the 50-day Moving Average if they are rejected. The 10-year ended Friday battling the ceiling at its 50-day Moving Average.
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