Monday Market Update – 03/07/2022

Mortgage Rates Fall

Freddie Mac Primary Mortgage Market Survey as of March 3, 2022

Geopolitical tensions caused U.S. Treasury yields to recede this week as investors moved to the safety of bonds, leading to a short-lived drop in mortgage rates. Unemployment is down but it comes with wage pressures when combined with ongoing and historically high inflation, the cascading impacts of the war in Ukraine have created significant market uncertainty. We saw this last week with wild swings in the treasury, equity and bond markets, while money sought safety. Even with the intraday and intraweek volatility, rates are expected to stay low (and yes, 4% is still historically low) in the short-term but will likely increase in the coming months. Housing inventory is still not at a level that will relieve price pressures and while some home sales may not receive offers far in excess of the list price, homes with desirable features in sought after neighborhoods will remain competitive.

Opinions, estimates, forecasts, and other views contained in this document are those of Freddie Mac’s Economic & Housing Research group, do not necessarily represent the views of Freddie Mac or its management, and should not be construed as indicating Freddie Mac’s business prospects or expected results. Although the Economic & Housing Research group attempts to provide reliable, useful information, it does not guarantee that the information or other content in this document is accurate, current or suitable for any particular purpose. All content is subject to change without notice. All content is provided on an “as is” basis, with no warranties of any kind whatsoever. Information from this document may be used with proper attribution. Alteration of this document or its content is strictly prohibited. ©2022 by Freddie Mac.

Week of February 28, 2022 in Review

Job creations were strong in February, while comments from the Fed and ongoing fear and uncertainty surrounding Russia’s invasion of Ukraine contributed to added volatility in the markets.

Job growth beat expectations in February, per the Bureau of Labor Statistics (BLS), which reported 678,000 new jobs versus the 400,000 job creations that were anticipated. Positive revisions to the data for December and January, which added 92,000 new jobs in those months combined, made last week’s report even stronger. The Unemployment Rate decreased from 4.0% to 3.8%. However, one of the key takeaways is that average hourly and weekly earnings came in much lower than expectations.

Private sector payrolls also came in a bit stronger than expected in February, with the ADP Employment Report showing that there were 475,000 jobs created. Adding to the strength of the report were big revisions to January’s data, which was revised higher from 301,000 job losses to 509,000 job gains. Yet, the news was mixed across the various sizes of businesses, with small businesses losing 96,000 jobs, while large businesses gained 552,000 jobs.

Initial Jobless Claims fell by 18,000 in the latest week, as the number of people filing for benefits for the first time totaled 215,000. While Continuing Claims moved a notch higher by 2,000 to 1.476 million, this is just off the lowest level since 1970. There are now 1.971 million people in total receiving benefits, which is a stark contrast to the nearly 18.6 million people receiving benefits in the comparable week last year.

In housing news, CoreLogic’s Home Price Index report for January showed that home prices rose by 1.4% from December and 19.1% year over year. This annual reading is an acceleration from 18.5% in December and is the highest reading in the 45-year history of the index.

Rents were also on the rise, with Apartment List’s National Rent Report showing that rents were up 0.6% in February, which is a reacceleration after a few months of slowing increases. Year over year, rents were up 17.6%, almost matching the rise in home price appreciation. To put this in context, annual rent growth averaged just 2.3% in the pre-pandemic years from 2017-2019.

Also of note, the ISM Manufacturing Index, which measures the health of the manufacturing sector in the US, came in at 58.6 for the month of February. This was higher than last month’s reading of 57.6 and above expectations of 58.0.

The Fed also made headlines, as Fed Chair Jerome Powell delivered his Semiannual Monetary Policy Report to Congress, which caused quite a reaction in the Bond market on Wednesday. Don’t miss our important explanation about this below. 

Lastly, volatility continued throughout global markets due to the uncertainty surrounding Russia’s ongoing invasion of Ukraine, especially toward the end of the week as there was news that Russia had captured a Ukrainian nuclear facility.

As can happen during times of geopolitical fear and uncertainty, we saw a flight to safety on Friday 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.

Strong Job Creations in February, But Wages Miss Expectations

 BLS Jobs Report 3

The Bureau of Labor Statistics (BLS) reported that there were 678,000 jobs created in February, which was much more than expectations of 400,000. In addition, there were positive revisions to the data for December and January adding 92,000 new jobs in those months combined, making last week’s report even stronger.

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 548,000 job creations, while the labor force increased by 304,000. The Unemployment Rate decreased from 4.0% to 3.8%. 

The U-6 all-in unemployment rate, which is more indicative of the true unemployment rate, increased slightly from 7.1% to 7.2%. It is now almost back at the levels we saw in February 2020 before the pandemic began.

Despite the strong headline number, one of the key takeaways is that average hourly and weekly earnings came in much lower than expectations. Average hourly earnings were flat in February versus an estimated 0.5% rise and were up 5.1% year over year. Average weekly earnings were only up slightly for the month and they were up 5.4% year over year.February Private Payrolls Beat Expectations 

 ADP 3

The ADP Employment Report, which measures private sector payrolls, showed that there were 475,000 job creations in February. This was a bit stronger than expectations of 400,000 job gains.

Adding to the strength of the report were big revisions to January’s data, which was revised higher from 301,000 job losses to 509,000 job gains. This marks a total revision of 810,000 jobs, and such a big revision does call into question the reliability of this report.

Both goods-producing and service-providing sector companies showed gains, with services contributing the majority share at 417,000 jobs. Leisure and hospitality had the biggest gains with 170,000 jobs, followed by trade, transportation, and utilities at 98,000, and professional and business at 72,000.

However, the news was mixed across the various sizes of businesses. Small businesses (1-49 employees) lost 96,000 jobs, while mid-sized businesses (50-499 employees) gained 18,000 jobs, and large businesses (500 or more employees) gained 552,000 jobs.

This dynamic is understandable, given that large businesses are better suited to compete with higher wages and benefit offerings. Small businesses are losing ground as they struggle to keep pace and, in turn, are less successful attracting talent from the limited pool of qualified workers.

Initial Jobless Claims Decline in Latest Week

 Jobless Claims 3

Initial Jobless Claims fell by 18,000 in the latest week, as the number of people filing for benefits for the first time totaled 215,000.

Continuing Claims, which measure people who continue to receive benefits after their initial claim is filed, ticked a notch higher by 2,000 to 1.476 million. However, this is just off the lowest level since 1970.

There are now 1.971 million people in total receiving benefits, which is a decrease from 2.033 million in the prior week and a stark contrast to the nearly 18.6 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.

Home Price Appreciation Hits a Record

CoreLogic released their Home Price Index report for January, showing that home prices rose by 1.4% from December and 19.1% year over year. This annual reading is an acceleration from 18.5% in December and is the highest reading in the 45-year history of the index.

Within the report, the hottest markets remained Phoenix (+30%), Las Vegas (+25%), and San Diego (+23%).

CoreLogic forecasts that home prices will appreciate 0.2% in February and 3.8% in the year going forward. Yet, they remain conservative in their forecasting and continue to miss forecasts by a large margin.

For example, CoreLogic had forecasted prices would remain flat in January, and they actually rose 1.4%. Plus, when we look to their report for last January, they forecasted that home prices would increase 4% annually, while last week they reported that prices actually rose 19.1% year over year.

Apartment List’s National Rental Report showed that rents were also on the rise, up 0.6% in February, which is a reacceleration after a few months of slowing increases. Year over year, rents were up 17.6%, almost matching the rise in home price appreciation. To put this in context, annual rent growth averaged just 2.3% in the pre-pandemic years from 2017-2019.  

Fed Chair Powell’s Testimony Moves Markets

Fed Chair Jerome Powell delivered his Semiannual Monetary Policy Report to Congress, which caused Mortgage Bonds to fall sharply on Wednesday.

Remember 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.

In his testimony, Powell gave support for a 25bp hike to the Fed Funds Rate instead of a 50bp hike. Why is this significant?

It suggests that the Fed is going to be less aggressive about addressing inflation, despite how rapidly it has risen and even in the face of oil prices now rising sharply as well. Powell also said the Fed will need to be “nimble” and “careful” because of the highly uncertain geopolitical backdrop.

 These comments bring into question whether the Fed will have the resolve to continue to hike the Fed Funds Rate and tame inflation. As a result of the Fed appearing less aggressive, Stocks rallied while Bonds plummeted on Wednesday.

What to Look for This Week

The economic calendar is relatively quiet with the biggest report of the week coming on Thursday when the Consumer Price Index will give us an update on February’s inflation readings. The previous reading showed headline inflation at 7.5% and core inflation, which strips out food and energy prices, at 6.0%. Expectations are for these figures to continue to rise to 7.9% and 6.4% respectively, which is extremely hot. This will likely get the attention of the Bond market.

Also on Thursday, the latest Jobless Claims data will be reported while Tuesday brings an update on how small businesses are feeling via the National Federation of Independent Business Small Business Optimism Index.

Investors will also be closely watching Wednesday’s 10-year Note and Thursday’s 30-year Bond auctions for the level of demand, while the uncertainty surrounding the ongoing war in Ukraine will likely add to volatility.

Technical Picture

Mortgage Bonds ended last week trading in a range between support at the 25-day Moving Average and overhead resistance at the 101.423 Fibonacci Level. The 10-Year has broken beneath its 50-day Moving Average. The next floor of support is nearly 10 basis points lower at the 100-day Moving Average.

Monday Market Update – 02/28/2022

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.

Opinions, estimates, forecasts, and other views contained in this document are those of Freddie Mac’s Economic & Housing Research group, do not necessarily represent the views of Freddie Mac or its management, and should not be construed as indicating Freddie Mac’s business prospects or expected results. Although the Economic & Housing Research group attempts to provide reliable, useful information, it does not guarantee that the information or other content in this document is accurate, current or suitable for any particular purpose. All content is subject to change without notice. All content is provided on an “as is” basis, with no warranties of any kind whatsoever. Information from this document may be used with proper attribution. Alteration of this document or its content is strictly prohibited. ©2022 by Freddie Mac.

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 2

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

 case shiller hpi

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

 Jobless Claims 2

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.

Technical Picture

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

“Monday” Market Update – 2/22/2022

Mortgage Rates Continue to Jump

U.S. weekly averages as of February 17, 2022

Mortgage rates jumped again due to high inflation and stronger than expected consumer spending. The 30-year fixed-rate mortgage is nearing four percent, reaching highs we have not seen since May 2019. As rates and house prices rise, affordability has become a substantial hurdle for potential homebuyers, especially as inflation threatens to place a strain on consumer budgets.

Opinions, estimates, forecasts, and other views contained in this document are those of Freddie Mac’s Economic & Housing Research group, do not necessarily represent the views of Freddie Mac or its management, and should not be construed as indicating Freddie Mac’s business prospects or expected results. Although the Economic & Housing Research group attempts to provide reliable, useful information, it does not guarantee that the information or other content in this document is accurate, current or suitable for any particular purpose. All content is subject to change without notice. All content is provided on an “as is” basis, with no warranties of any kind whatsoever. Information from this document may be used with proper attribution. Alteration of this document or its content is strictly prohibited. © 2022 by Freddie Mac.

Week of February 14, 2022 in Review

News on housing, inflation and the minutes from the Fed’s latest meeting all made headlines, while investors were also closely watching the news surrounding Russia and Ukraine.

 Sales of existing homes were up 6.7% in January, coming in much stronger than estimates of a 4% drop and reflecting the big demand for homes that remains around the country. But the real story was the inventory shortage. There were only 860,000 homes for sale at the end of January, which is another record low and down from December’s reading of 910,000. Inventory was 16.5% lower than January 2021 and a completely different picture compared to the bubble-like conditions we saw in 2007 when there were 3.7 million homes for sale.

The high demand for homes has also kept builders confident even in the face of higher building material costs and the lack of skilled labor. Though builder confidence fell 1 point to 82 in February per the National Association of Home Builders Housing Market Index, any reading over 50 on this index (which runs from 0 to 100) signals expansion. So, confidence remains at a strong level despite the slight decline.

Meanwhile, Housing Starts, which measure the start of construction on homes, fell by 4.1% in January. Starts for single-family homes also declined. On the positive front, Building Permits, which are a good forward-looking indicator for Housing Starts, increased. However, one of the main takeaways is that the backlog of homes continues to grow. Homes authorized but not yet started were up 37.3% year over year.

Rental prices were also on the rise, as CoreLogic’s Single-family Rent Report showed they increased 12% year over year in December – the fastest increase in over 16 years. Note that this report measures both new and renewal rents for both single-family homes and condos, putting it slightly lower than recent data from Apartment List. Their rent report, which looks primarily at new rents, showed nearly 18% annual growth in January. To put this in context, annual rent growth averaged just 2.3% in the pre-pandemic years from 2017-2019.

Wholesale inflation remains red hot, with the Producer Price Index coming in double market expectations at a 1% rise in January. On a year over year basis, the index was at 9.7%, which is just off December’s record high since the methodology for collecting data was changed in 2010. Core PPI, which strips out volatile food and energy prices, rose 0.8% in January, while the year over year figure remained at a record 8.3%.

Rising inflation is critical to monitor because it can have a big impact on Mortgage Bonds and home loan rates. Investors were highly anticipating Wednesday’s release of the minutes from the Fed’s January meeting, to learn more about how the Fed plans to address inflation. Read more about this below.

Investors were also closely watching the events regarding Russia and Ukraine. Bonds can act as a safe haven when the economy is doing poorly or in periods of time where there is geopolitical risk, like war or terrorism. 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. We have seen some of this dynamic of late, and it’s something to continue to monitor as events unfold.

Lastly, Wednesday’s 20-year Bond auction was met with just above average demand. The bid to cover of 2.44 was above the one-year average of 2.38. Direct and indirect bidders took 83.9% of the auction compared to 79.9% in the previous 12.

Existing Home Sales Much Stronger Than Expected

 Existing Home Sales 2

Existing Home Sales, which measure closings on existing homes, showed that sales were up 6.7% in January at an annualized pace of 6.5 million units. This was much stronger than estimates of a 4% drop. On a year over year basis, sales are down 2.3%, which is quite miraculous considering higher rates, higher home prices, and no inventory.

And speaking of inventory, there were only 860,000 homes for sale at the end of January, which is another record low and down from December’s reading of 910,000. Inventory is 16.5% lower than last year and a completely different picture compared to the bubble-like conditions we saw in 2007 when there were 3.7 million homes for sale.

There was only a 1.6 months’ supply of homes available for sale at the end of January, Six months is considered a more balanced market, so the current low inventory levels speak to the imbalance of supply and demand. Homes were only on the market for 19 days in January, which should continue to be supportive of home prices.

The median home price was reported at $350,300, which is up 15.4% year over year. Remember that the median home price is not the same as appreciation. It simply means half the homes sold were above that price and half were below it. This figure continues to be skewed by the mix of sales, as sales on the lower end are down sharply, while sales above $500,000 are much higher.

First-time homebuyers accounted for 27% of sales, which is down from 30% in December. Cash buyers rose sharply from 23% to 27%, while investors purchased 22% of homes, up from 17%. Foreclosures and short sales accounted for less than 1% of all transactions.

Construction Backlog Remains

 Housing Starts 2

Housing Starts, which measure the start of construction on homes, fell by 4.1% in January to an annualized rate of 1.638 million homes. However, Starts were up 0.8% when compared to January 2021.

Starts for single-family homes, which are the most important because they are in such high demand among buyers, fell by 5.6% from December to January. They were also 2.4% lower on an annual basis.

Building Permits, which are a good forward-looking indicator for Housing Starts, rose by 0.7% in January and they were up 0.8% year over year. Single-family permits also rose 6.8% in January, but they were still down 5% year over year.

One of the main takeaways is that the backlog of homes continues to grow. Completions fell by 5.2% in January and they were down 6.2% from the same time last year, speaking to the challenges builders are having with materials and labor. 

In addition, homes authorized but not yet started increased by 4.9% in January and they were up 37.3% year over year. Single-family homes authorized but not yet started are up 32.5% year over year.

Builders will continue to try and put more inventory on the market, but they are significantly lagging demand, especially on the single-family home front. This ongoing imbalance in supply and demand should continue to be supportive of home prices.

Builders Remain Confident Despite Rising Costs and Labor Shortages

 NAHB Housing Market Index 2

The National Association of Home Builders Housing Market Index, which is a real-time read on builder confidence, fell 1 point to 82 in February. However, any reading over 50 on this index, which runs from 0 to 100, signals expansion, so confidence remains at a strong level despite the decline.

For perspective, this index was at 80 last October, 83 in November and reached an all-time high of 90 in November 2020.

Looking at the components of the index, current sales conditions rose 1 point to 90, sales expectations for the next six months fell 2 points to 80, and buyer traffic also dropped 4 points to 65.

NAHB’s chief economist, Robert Dietz, said, “Residential construction costs are up 21% on a year-over-year basis, and these higher development costs have hit first-time buyers particularly hard.”

The bottom line is that the high demand for homes has kept builders confident even in the face of higher building material costs and the lack of skilled labor.

Wholesale Inflation Continues to Set Record Highs

The Producer Price Index, which measures inflation on the wholesale level, came in double market expectations, rising 1% in January. On a year over year basis, the index decreased from December’s revised higher reading of 9.8% to 9.7%. This is just off December’s record high since the methodology for collecting data was changed in 2010.

Core PPI, which strips out volatile food and energy prices, rose 0.8% in January, coming in hotter than expectations of 0.5%. The year over year figure remained at a record 8.3%.

Producer inflation remains elevated, which often leads to hotter consumer inflation levels, as producers pass those higher costs along to consumers.

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, and what the Fed may do in the coming months to bring inflation in check, remains critical.

No Real Surprises in Fed Minutes

The minutes from the Fed’s January meeting showed that the Fed is prepared to raise their Fed Funds Rate and shrink their balance sheet soon.

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.

The minutes strongly indicate that a hike to the Fed Funds Rate is on the way as soon as March. Officials have acknowledged inflation readings showing prices rising at the fastest pace in 40 years and that policy will need to be tighter to bring prices down.

Mortgage Bonds dipped sharply on Wednesday in anticipation of the minute’s release. Fortunately, the minutes didn’t contain any surprises and the market rallied afterwards as a result.

Labor Market Remains Tight

 Jobless Claims 2

The number of people filing for unemployment benefits for the first time increased by 23,000 in the latest week, as Initial Jobless Claims were reported at 248,000.

Continuing Claims, which measure people who continue to receive benefits after their initial claim is filed, decreased 26,000 to 1.59 million.

There are now 2.063 million people in total receiving benefits, which is a decrease from 2.099 million in the prior week and a stark contrast to the nearly 19 million people receiving benefits in the comparable week the previous year. Claims are at very strong pre-pandemic levels, showing that the labor market remains tight.

What to Look for This Week

After the market closures Monday for the Presidents Day holiday, Tuesday brings home price appreciation figures for December from the Case-Shiller Home Price Index and the Federal Housing Finance Agency (FHFA) House Price Index.

More housing news follows Thursday when January’s New Home Sales are reported, along with the latest Jobless Claims data and the second reading on fourth quarter GDP.

Crucial inflation data for January will be reported on Friday via Personal Consumption Expenditures, which is the Fed’s favored measure, as well as Personal Income and Spending. Pending Home Sales for January will also be released.

Technical Picture

Mortgage Bonds continue to trade in a wide range between support at 99.984 and overhead resistance at 100.617. The 10-year is down to 1.92% and has room to continue lower until reaching 1.88

Monday Market Update – 2/14/2022

Rate Review as of February 10, 2022

The normalization of the economy continues as mortgage rates jumped to the highest level since the emergence of the pandemic. Rate increases are expected to continue due to a strong labor market and high inflation, which likely will have an adverse impact on homebuyer demand but remember folks, we are still at 40 year lows for interest rates and with continued pressure on supply of homes in both new construction and resale properties, home purchases will continue to be an excellent way to reap the rewards of appreciation, while providing solid tax write-offs and your paying your own mortgage instead of someone else’s when you rent! It’s STILL a great time to buy a home!

Opinions, estimates, forecasts, and other views contained in this document are those of Freddie Mac’s Economic & Housing Research group, do not necessarily represent the views of Freddie Mac or its management, and should not be construed as indicating Freddie Mac’s business prospects or expected results. Although the Economic & Housing Research group attempts to provide reliable, useful information, it does not guarantee that the information or other content in this document is accurate, current or suitable for any particular purpose. All content is subject to change without notice. All content is provided on an “as is” basis, with no warranties of any kind whatsoever. Information from this document may be used with proper attribution. Alteration of this document or its content is strictly prohibited. © 2022 by Freddie Mac.

Week of February 7, 2022 in Review

Consumer inflation reached a 40-year high and Fed members made headlines in response. Jobless Claims continue to move in the right direction.

The Consumer Price Index (CPI) showed that consumer inflation rose by 0.6% in January while the year over year reading rose from 7% to 7.5% – the hottest level since 1982! Core CPI, which strips out volatile food and energy prices, also came in above expectations with a 0.6% rise. As a result, year over year Core CPI jumped from 5.4% to 6%.

The National Federation of Independent Business released important data that speaks to how inflation is impacting small businesses. The Small Business Optimism Index fell to 97.1 in January, which is the weakest since February 2021. Within the report, plans for higher selling prices rose another 4 points to the highest level since 1974. Compensation costs rose another 2 points to 50, which is the highest since 1984 when the question was first asked. Both of these figures reflect the rise in inflation.

Fed members have also been sharing their opinions about how the Fed should address rising inflation, and their actions in the coming months will be critical to monitor because they will have a big impact on Mortgage Bonds and interest rates. Read more about this below.

After Omicron sparked a rise in unemployment claims in the early part of January, Initial Jobless Claims declined again in the latest week, as the number of first-time filers fell by 16,000 to 223,000. Continuing Claims, which measure people who continue to receive benefits after their initial claim is filed, were unchanged at 1.62 million. There are now 2.099 million people in total receiving benefits, which is a stark contrast to the 20 million people receiving benefits in the comparable week the previous year. Claims are at very strong pre-pandemic levels, showing that the labor market remains tight.

Lastly, investors were closely watching Wednesday’s 10-year Treasury Note auction and Thursday’s 30-year Bond auction to see the level of demand.

Consumer Inflation Reaches 40-year High

The Consumer Price Index (CPI), which measures inflation on the consumer level, rose by 0.6% in January. This was hotter than expectations and pushed the year over year reading higher from 7% to 7.5% – the hottest level since 1982!

Note that annual inflation is calculated on a rolling 12-month basis, meaning that the total of the past 12 monthly inflation readings will give us the year over year rate of inflation. Each month, the most recent report replaces the oldest monthly reading.

The rise in inflation we have seen is due in part to the readings throughout 2021 replacing the low inflation readings from 2020 when much of the economy was shut down due to the pandemic. Last week, the 0.6% increase reported for January 2022 replaced the 0.2% rise previously reported for January 2021, causing the annual reading to rise.

Core CPI, which strips out volatile food and energy prices, also came in above expectations with a 0.6% rise. As a result, year over year Core CPI jumped from 5.4% to 6%.

Within the report, rents rose 0.5% in January and increased from 3.3% to 3.8% on a year over year basis. While this data has started to increase, the CPI report is still not capturing the double digit increases year over year that many other rent reports are showing.

Owners’ equivalent rent increased 0.4% and the year over year figure rose from 3.8% to 4.1%. However, note that this data is based on a survey that asks homeowners, “If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?” Understandably, this is very subjective and many people would be guessing how much their home would rent for.

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.

Fed Members Making Headlines

Rising inflation is a big reason why the Fed’s actions remain crucial to monitor in the months to come, as they will play an important role in the direction of the markets and mortgage rates this year.

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.

After the CPI report was released on Thursday, St. Louis Fed President Jim Bullard made some hawkish comments, saying that he wants to see 100bps of hikes by July 1, which would imply that we would need to see one 50bp hike and two 25bp hikes at the next three meetings.

Probably the biggest thing he said was that he thinks the Fed should be able to act and hike rates in between meetings. This was a new concept that shows just how serious he is about fighting inflation and removing accommodation.

Stocks sold off on the news, but so did Bonds. You may have thought that Mortgage Bonds would have responded better to the Fed being more serious about hiking rates and curbing inflation, but it also may mean that the Fed will more aggressively reduce their balance sheet, which Mortgage Bonds do not like. Some Fed members of late have made comments that the Fed should be selling Mortgage Bonds to reduce their balance sheet and holding onto their Treasuries.

It’s important to note that Bullard does make outlandish comments oftentimes and he is only one voting member. It does not mean that all the Fed members echo his thoughts. And on that note, we also heard from San Francisco Fed President Mary Daly last Thursday, and she said she is not on board with a 50bp hike and would rather see a 25bp hike. She is concerned with the Fed being too aggressive and thinks they need to move at a goldilocks pace.

Additionally, Richmond Fed President Tom Barkin said that while he is open to a 50bp hike, he does not think that the markets are screaming for one and would rather a 25bp hike. And we heard from Atlanta Fed President Raphael Bostic earlier in the week who said he supports a 25bp hike but that anything is on the table.

The bottom line is that we will want to closely watch how the Fed tries to walk the tightrope of hiking and allowing a balance sheet runoff during 2022.

Initial Jobless Claims Decline

 Jobless Claims 2

The number of people filing for unemployment benefits for the first time fell by 16,000 in the latest week, with Initial Jobless Claims reported at 223,000. After the rise in jobless claims in the first part of January, which was likely due to the rise in Omicron cases, claims are now falling once again as Omicron cases are slowing down.

Continuing Claims, which measure people who continue to receive benefits after their initial claim is filed, were unchanged at 1.62 million.

There are now 2.099 million people in total receiving benefits, and while this is an increase from 2.067 million in the prior week, it is a stark contrast to the 20 million people receiving benefits in the comparable week the previous year. Claims are at very strong pre-pandemic levels, showing that the labor market remains tight.

Strong Auction Demand Doesn’t Benefit Bonds

Investors were closely watching Wednesday’s 10-year Treasury Note auction and Thursday’s 30-year Bond auction to see the level of demand. High demand, which is reflected in the purchasing of Bonds and Treasuries, can push prices higher and yields or rates lower.

Weak demand, on the other hand, can signal that investors think yields will continue to move higher, which can have a negative effect on rates.

The 10-Year Treasury Note auction was met with strong demand as traders took advantage of some of the highest yields in more than two years. The bid to cover of 2.68 was better than the one-year average of 2.47. Direct and indirect bidders took 92.6% of the auction compared to 83.1% in the previous 12. However, we did not have the positive reaction we would expect in yields.

Thursday’s 30-Year Bond auction was met with average demand. The bid to cover of 2.30 was just above the one-year average of 2.29. Direct and indirect bidders took 84.8% of the auction compared to 81.1% in the previous 12.

What to Look for This Week

More inflation news is ahead when the latest Producer Price Index is released on Tuesday, which will give us a read on January wholesale inflation. Tuesday also brings an update on manufacturing for the New York region when February’s Empire State Index is reported.

On Wednesday, we’ll get an update on Retail Sales for January as well as how confident builders are feeling this month via the National Association of Home Builders Housing Market Index. The minutes from the Fed’s January meeting will also be released and those always have the potential to be market moving.

Thursday brings more housing news with January’s Housing Starts and Building Permits, along with the latest Jobless Claims data and more manufacturing news via February’s Philadelphia Fed Index.

Ending the week on Friday, we’ll get an update on Existing Home Sales for January.   

Technical Picture

Mortgage Bonds fell sharply late last week and even broke beneath an important Fibonacci level of support at 99.984 on Friday. Things suddenly took a turn Friday afternoon as increased tensions between Ukraine and Russia sent oil prices spiking, which triggered a sell-off in stocks and Mortgage Bonds rallied on this flight to safety.

The 10-year is trading below 2% again after touching 2.05% Friday morning. Yields do have some room to improve to the downside if we can get some momentum until reaching 1.88%.

Monday Market Update – 2/7/2022

Mortgage Rates Remain Unchanged from Last Week

February 3, 2022

The economy lost some momentum in January, leaving mortgage rates unchanged from last week and relatively flat for the third consecutive week. This stagnation reflects the economic impact of the Omicron variant of COVID-19, which we believe will subside in the coming months. As economic recovery continues going into the spring and summer, mortgage rates are expected to resume their upward trajectory. In the meantime, recent data suggests that homebuyer demand continues to be elevated as supply remains low, driving higher home prices.

Opinions, estimates, forecasts, and other views contained in this document are those of Freddie Mac’s Economic & Housing Research group, do not necessarily represent the views of Freddie Mac or its management, and should not be construed as indicating Freddie Mac’s business prospects or expected results. Although the Economic & Housing Research group attempts to provide reliable, useful information, it does not guarantee that the information or other content in this document is accurate, current or suitable for any particular purpose. All content is subject to change without notice. All content is provided on an “as is” basis, with no warranties of any kind whatsoever. Information from this document may be used with proper attribution. Alteration of this document or its content is strictly prohibited. © 2022 by Freddie Mac.

Omicron’s impact on the labor market was evident in January while December saw home prices continue to rise.

Economists were anticipating 150,000 job creations in January, but job growth came in well above these expectations per the Bureau of Labor Statistics (BLS), which reported 467,000 new jobs. In addition, there were positive revisions to the data for November and December adding 709,000 new jobs in those months combined, making last week’s report even stronger.

However, private sector payrolls missed expectations in January, with the ADP Employment Report showing that there were 301,000 job losses – well below the 200,000 job gains that were expected. Losses were reported across all sizes of businesses, with the majority in small businesses. Part of the miss has to do with when Omicron cases peaked and how this data is collected, as explained below.

After the recent rise in jobless claims, likely due to the rise in Omicron cases, Initial and Continuing Claims both declined in the latest week as Omicron cases are slowing down. There are now 2.067 million people in total receiving benefits, which is a stark contrast to the 18.5 million people receiving benefits in the comparable week the previous year. Claims are at very strong pre-pandemic levels, showing that the labor market remains tight.

The JOLTS (Job Openings and Labor Turnover Survey) report showed that there were almost 11 million job openings in December, which is near the record high of almost 11.1 million reported last July. While Omicron certainly could have impacted this data, it is also not surprising, as many companies have expressed a need for more workers.

In housing news, CoreLogic’s Home Price Index report for December showed that home prices rose by 1.3% from November and 18.5% year over year. This annual reading is an acceleration from 18% in November and is the highest reading in the 45-year history of the index.

Meanwhile, Apartment List’s National Rent Report showed that rents also rose 0.2% in January and almost 18% year over year. To put this in context, annual rent growth averaged just 2.3% in the pre-pandemic years from 2017-2019. Over the last four months, rents are up about 1% and while the rise in rents is slowing, this could be due to some seasonal factors. It is possible that higher rent growth may return as more people move once the weather warms.

Lastly, the Fed’s actions remain crucial to monitor in the months to come, as they will play an important role in the direction of the markets and mortgage rates this year. Don’t miss our important breakdown on what’s happened in past cycles and what to look out for ahead.

January Job Creations Beat Expectations

 BLS Jobs Report 2

The Bureau of Labor Statistics (BLS) reported that there were 467,000 jobs created in January, which was much more than expectations of 150,000. In addition, there were positive revisions to the data for November and December adding 709,000 new jobs in those months combined, making last week’s report even stronger.

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 1.2 million job creations, while the labor force increased by 1.39 million. The number of unemployed people increased by 194,000, causing the unemployment rate to increase slightly from 3.9% to 4%.

The U-6 all-in unemployment rate, which is more indicative of the true unemployment rate, improved from 7.3% to 7.1%, meaning it is almost back at the levels we saw in February 2020 before the pandemic began.

Average hourly earnings rose by 0.7% in January and are up 5.7% year over year, which is a full percentage point higher than the previous reading. Average weekly earnings were only up slightly on a monthly basis due to less hours being worked, which is likely due to Omicron’s impact. On an annual basis, they were up 4.2%.

 Private Payrolls Drop in January

 ADP Employment Report 2

The ADP Employment report, which measures private sector payrolls, showed that there were 301,000 job losses in January – well below the 200,000 job gains that were expected. December’s figures were also revised slightly lower from 807,000 to 776,000 new jobs in that month.

Job losses were reported across all sizes of businesses, with the majority of those reported at small businesses. Small businesses (1-49 employees) lost 144,000 jobs, mid-sized businesses (50-499 employees) lost 59,000 jobs, and large businesses (500 or more employees) lost 98,000 jobs.

To understand the miss in this data, it’s important to look at how it’s collected. Over 14 million workers missed work at some time during January due to Omicron. If they were not working and not receiving paid sick leave during the sample week in which the data was collected, those workers were not counted as employed.

The sample week was the week that included January 12 and the peak of Omicron cases was January 11. And since most of the job losses came from small businesses, particularly those with 1-19 employees (-106,000 jobs), there is a good chance many of those businesses were not paying sick leave.

Initial and Continuing Jobless Claims Decline

 Jobless Claims 2

The number of people filing for unemployment benefits for the first time fell by 23,000 in the latest week, with Initial Jobless Claims reported at 238,000. Continuing Claims, which measure people who continue to receive benefits after their initial claim is filed, also fell 44,000 to 1.63 million.

After the recent rise in jobless claims, which was likely due to the rise in Omicron cases, claims are now falling once again as Omicron cases are slowing down.

There are now 2.067 million people in total receiving benefits, which is a decline from 2.14 million in the prior week and a stark contract to the 18.5 million people receiving benefits in the comparable week the previous year. Claims are at very strong pre-pandemic levels, showing that the labor market remains tight.

Home Price Appreciation Reaches New High

CoreLogic released their Home Price Index report for December, showing that home prices rose by 1.3% from November and 18.5% year over year. This annual reading is an acceleration from 18% in November and is the highest reading in the 45-year history of the index.

Within the report, the hottest markets remained Phoenix (+30%), Las Vegas (+24%), and San Diego (+22%).

CoreLogic forecasts that home prices will remain flat in January and appreciate 3.5% in the year going forward. Yet, they remain conservative in their forecasting and continue to miss forecasts by a large margin.

For example, CoreLogic had forecasted prices would remain flat from November to December, and they actually rose 1.3%. And when we look to their report for December 2020, they forecasted that home prices would increase 2.5% annually – and yet they reported today that prices rose 18.5%. 

Apartment List’s National Rent Report showed that rents also rose 0.2% in January and almost 18% year over year. To put this in context, annual rent growth averaged just 2.3% in the pre-pandemic years from 2017-2019. Over the last four months, rents are up about 1%. While the rise in rents is slowing, this could be due to some seasonal factors and it is possible that higher rent growth may return as more people move once the weather warms.

What to Look for From the Fed in the Months Ahead

The Fed’s actions remain crucial to monitor in the months to come, as they will play an important role in the direction of the markets and mortgage rates this year.

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.

Looking at past cycles, when the Fed began hiking the Fed Funds Rate in December 2015, mortgage rates moved lower. They waited a full year until the next hike, and during that time, inflation rose and mortgage rates moved higher. When they hiked again in December 2016, mortgage rates moved lower as inflation was put in check.

In October 2017, the Fed announced that they would start to allow their balance sheet to runoff and we saw mortgage rates move higher in response. When they began to slow the runoff in March 2019, mortgage rates moved lower and then really started to move down in July when the Fed ended the runoff altogether and started reinvesting in MBS and Treasuries.

Again, the point here is that mortgage rates like when the Fed hikes the Fed Funds Rate and hate when they reduce their balance sheet. We saw some of this dynamic last week when the Bank of England announced they were starting the runoff of their balance sheet, noting that by the end of 2023 they will not just stop reinvestments, they will be outright sellers of Bonds. Global yields can impact our yields and Mortgage Bonds did not react favorably to the news when it was announced.

The bottom line is that we will want to closely watch how the Fed tries to walk the tightrope of hiking and allowing runoff during 2022.

What to Look for This Week

The week kicks off on Tuesday with an update on how small businesses are feeling when the National Federation of Independent Business Small Business Optimism Index for January is reported.

Thursday brings a crucial update on inflation with January’s Consumer Price Index along with the latest Jobless Claims figures. 

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 below the well-defined range they had been trading in, falling beneath the floor at 101.578. They went all the way down to the next floor at 101 but bounced higher from it. The 10-year ended last week trading at around 1.91% – you have to go back around 2.5 years to see yields meaningful

Monday Market Update – 01/31/2022

Mortgage Rates Stay Relatively Flat

January 27, 2022

Following a month-long rise, mortgage rates effectively stayed flat this week. Recent rate increases have yet to significantly impact purchase demand, as history demonstrates that potential homebuyers who are on the fence will often enter the market at the start of rate increase cycles. We do expect rates to continue to increase but at a more gradual pace. Therefore, a fair number of current homeowners could continue to benefit from refinancing to lower their mortgage payment.

Opinions, estimates, forecasts, and other views contained in this document are those of Freddie Mac’s Economic & Housing Research group, do not necessarily represent the views of Freddie Mac or its management, and should not be construed as indicating Freddie Mac’s business prospects or expected results. Although the Economic & Housing Research group attempts to provide reliable, useful information, it does not guarantee that the information or other content in this document is accurate, current or suitable for any particular purpose. All content is subject to change without notice. All content is provided on an “as is” basis, with no warranties of any kind whatsoever. Information from this document may be used with proper attribution. Alteration of this document or its content is strictly prohibited. © 2022 by Freddie Mac.

Week of January 24, 2022 in Review

Housing news, inflation data and the Fed’s first meeting of the year led to plenty of volatility in the markets.

The Fed’s favorite measure of inflation, Personal Consumption Expenditures (PCE), showed that headline inflation rose 0.4% in December, which was in line with expectations. Year over year, the index increased from 5.7% to 5.8%. 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 4.7% to 4.9%. Both annual inflation readings are the hottest in roughly 40 years!

Rising inflation is crucial to monitor and that’s a big reason why investors were closely watching the Fed’s Monetary Policy Statement and press conference on Wednesday afternoon for guidance about how the Fed plans to address this. Don’t miss our important breakdown below.

In housing news, demand for homes around the country remains strong, with sales of news homes up nearly 12% from November to December. Interestingly, most of the increase in December’s sales were in the category of “homes sold not started,” which speaks to the backlog builders are facing. Pending Home Sales, which measure signed contracts on existing homes, did come in below expectations in December. However, sales were still quite strong considering the holiday season, rise of Omicron cases, and record low inventory levels.

This dynamic of strong demand and low inventory around the country continues to help home prices appreciate. The Case-Shiller Home Price Index showed that home prices rose 0.9% in November 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 1.1% in November and were up 17.5% year over year.

Lastly, the advanced or first reading for GDP in the fourth quarter of last year showed that the US economy grew by 6.9% annualized. There are a few caveats to note about this reading, as highlighted below.

Annual Inflation Reaches Hottest Level in 40 Years

The Fed’s favorite measure of inflation, Personal Consumption Expenditures (PCE), showed that headline inflation rose 0.4% in December, which was in line with expectations. This caused the year over year reading to increase from 5.7% to 5.8%.

Core PCE, which strips out volatile food and energy prices and is the Fed’s real focus, was also in line with estimates as it was up 0.5%. The year over year reading increased from 4.7% to 4.9%. Both annual inflation readings are the hottest in roughly 40 years!

Annual inflation will likely continue to increase, as the next two monthly readings that we will be replacing from January and February 2021 are 0.3%. If the readings for January and February of this year are above this level, the year over year figures will increase.

Wage growth is contributing to inflation but is offsetting it to a degree. Incomes were up 0.3% in December and private sector wages were up by 0.8%. If you were to annualize the past six months, private sector wages are up 10% annually. This is a good thing for affordability on homes.

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.

Market Volatility Follows First Fed Meeting of the Year

The Fed held its first two-day Federal Open Market Committee meeting of the year, with their Monetary Policy Statement and press conference coming on Wednesday afternoon. Investors were closely watching both for guidance regarding how the Fed plans to address rising inflation.

Note that the Fed has two levers that 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.

Initially, the Fed statement that was released on Wednesday appeared to be more dovish than the markets expected, sparking a rally in the equity markets. The Fed appeared to be less aggressive in removing accommodation than the markets anticipated, with no mention of the number of hikes to the Fed Funds Rate or balance sheet runoff.

The Fed then released a second statement regarding the balance sheet runoff, explaining how after they hiked the Fed Funds Rate, they were going to begin QT (Quantitative Tightening or reducing the balance sheet). But they did not give an idea of when or by how much. Once Bonds got wind of this, they sold off sharply on Wednesday.

However, things changed for the equity markets during Fed Chair Jerome Powell’s press conference, as it was clear he had a very hawkish tone. Powell stressed how strong the economy was, how broad and fast the wage upturn has been, and how we are in a much stronger economic situation than when we started tightening in 2015.

Meanwhile, we have been seeing growth and sales slow, and while the labor market has been showing gains, that is expected after a pandemic and the participation rate is incredibly low. Powell believes the slowdown is all Omicron related and made it clear that the primary (and really only) concern was inflation risk to the upside.

Powell also said that the Fed has no control over the yield curve, which sounds like the Fed is going to go full steam ahead on hiking the Fed Funds Rate, regardless of if it flattens and sends the US into a recession.

Again, as noted above, 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.

The bottom line is that the Fed’s actions remain crucial to monitor in the months to come, as they will play an important role in the direction of the markets and mortgage rates this year.

New and Pending Home Sales Show Strong Demand Remains

New Home Sales, which measure signed contracts on new homes, were up nearly 12% from November to December at an 811,000 annualized pace. This was much stronger than expectations of a 1.7% gain. Sales for November were revised lower from 744,000 to 725,000 and when factoring this in, sales were still up a solid 9%. Year over year, sales were down 14%.

The median home price came in at $377,700, which is a decline of almost 10% from November. 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 up 3.4% year over year and points to an increase in lower-priced homes sold. There was a big increase in homes sold between $200,000 to $300,000, which is a good sign especially for first-time buyers.

Interestingly, most of the increase in December’s sales were in the category of “homes sold not started,” which speaks to the backlog builders are facing.

 Pending Home Sales 1

Also of note, Pending Home Sales, which measure signed contracts on existing homes, came in below expectations, falling 3.8% in December. Though sales were down 6.9% year over year, they are still quite strong considering the holiday season, rise of Omicron cases, and record low inventory levels. Quite simply, if there were more homes for sale, we would have seen more contracts signed.

Home Price Appreciation Continues

 Case Shiller Home Price Index

The Case-Shiller Home Price Index, which is considered the “gold standard” for appreciation, showed home prices rose 0.9% in November and 18.8% year over year. This annual reading was slightly lower than the 19% increase reported for October.

This data points to two important questions. Why are the year over year appreciation figures declining? Does this mean home prices are moving lower?

The pace of appreciation month over month is decelerating, but we are still seeing home price gains. For example, in November 2020 home prices rose 1.3% while in November 2021 they rose 0.9%. Because the data for November 2021 shows a slower pace of appreciation then what was reported for November 2020, the year over year figure declined. But home prices are still increasing.

The top three performing cities were Phoenix (+32%), Tampa (+29%) and Miami (+27%). Even the three worst-performing cities, including Chicago, Minneapolis, and Washington, saw roughly 11% gains.

 FHFA House Price Index

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 1.1% in November and were up 17.5% year over year, which is slightly higher than the 17.4% annual reading reported for October.

Initial Jobless Claims Move Lower After Recent Rise

 Jobless Claims 1

After increasing over the last few weeks, the number of people filing for unemployment benefits for the first time fell by 30,000 to 260,000. While we don’t know definitively how much of the recent rise was due to Omicron, with COVID cases declining we should get a clearer picture in the coming weeks.

Continuing Claims, which measure people who continue to receive benefits after their initial claim is filed, rose 51,000 to 1.675 million.

There are now 2.14 million people in total receiving benefits, and while this is an increase of 8,400 in the latest week, it is still a stark contract to the nearly 19 million people receiving benefits in the comparable week the previous year.

A Note on GDP

The advanced or first reading for GDP in the fourth quarter of last year showed that the US economy grew by 6.9% annualized. This was stronger than the 6% expected and follows a 2.3% print in the third quarter.

There are a few things to note about this reading. First, it does not mean that we saw 6.9% growth in the fourth quarter. The real number was 1.725% but that figure is annualized or multiplied by 4.

In addition, much of the growth was inventory build ahead of the holidays, which added 4.9% to the reading. There were likely a lot of double and triple orders due to ongoing supply chain issues, which means that first quarter 2022 GDP will likely moderate significantly.

What to Look for This Week

The week kicks off with important manufacturing news on Monday when the Chicago PMI for January is reported. January’s ISM Index follows on Tuesday.

Tuesday also brings more news on home price appreciation when CoreLogic releases its December Home Price Index report

Then investors will be closely watching labor sector data, beginning Wednesday when the ADP Employment Report will give us an update on private payrolls for January. Thursday brings the latest Initial Jobless Claims data.

Ending the week on Friday, the highly anticipated Bureau of Labor Statistics Jobs Report for January will be released, which includes Non-farm Payrolls and the Unemployment Rate.

Technical Picture

Mortgage Bonds ended last week trading just near overhead resistance at 102.198 with support all the way down at 101.578. The 10-year remains in a wide range between 1.88% and 1.77%.

Monday Market Update – 01/24/2022

Mortgage Rates Continue to Move Up

Rate Review as of January 20, 2022

Mortgage rates moved up again last week as the 10-year U.S. Treasury yield rose and financial markets adjusted to anticipated changes in monetary policy that will combat inflation. Some of the worsening in rates has been mitigated by improvements in the Mortgage Back Securities market late on Friday and again today but rates are as much as a half percentage point higher since the beginning of the year just three short weeks ago. These higher mortgage rates may be leading to a modest decrease in purchase demand but some believe that decrease is more a factor waiting for the spring homebuying season.

Realtors may consider the importance of educating buyers (and sellers) that supply remains near historically tight levels, leading to higher home prices and competitive market conditions (especially here in the San Francisco Bay Area and even more so for highly sought properties and neighborhoods). Even with interest higher than they’ve been in more than a year, demand is thought to also remain high. Just know that higher interest rates means more expensive housing payments. So, there is a cost of waiting that should be discussed with your clients, whether that be in higher payment or lost appreciation.

Your Up-To-Date Rate Indices can be found here but remember that your actual rate may vary. Looking to buy or refinance? Call me today at: 650-207-4364 so we can discuss your specific situation.

Opinions, estimates, forecasts, and other views contained in this document are those of Freddie Mac’s Economic & Housing Research group, do not necessarily represent the views of Freddie Mac or its management, and should not be construed as indicating Freddie Mac’s business prospects or expected results. Although the Economic & Housing Research group attempts to provide reliable, useful information, it does not guarantee that the information or other content in this document is accurate, current or suitable for any particular purpose. All content is subject to change without notice. All content is provided on an “as is” basis, with no warranties of any kind whatsoever. Information from this document may be used with proper attribution. Alteration of this document or its content is strictly prohibited. © 2022 by Freddie Mac.

Week of January 17, 2022 in Review

Low inventory, high demand and higher material costs continue to be the themes in the housing sector. Plus, Omicron showed its impact on manufacturing and unemployment claims. This push pull does little to alleviate the high prices of homes here on the west coast.

Sales of existing homes fell by 4.6% from November to December to an annualized pace of 6.2 million units. But the real story was record-low inventory. There were only 910,000 homes for sale at the end of December, which is down significantly from the 1.1 million homes that were available at the end of November.

Homes were only on the market for 19 days, even with higher prices and the lack of inventory, which speaks to the high demand for homes among potential buyers around the country. The ongoing tight supply and strong demand should be very supportive of home prices.

The high demand for homes has kept builders confident even in the face of higher building material costs and the lack of skilled labor. Builder confidence fell 1 point to 83 in January per the National Association of Home Builders Housing Market Index. Any reading over 50 on this index, which runs from 0 to 100, signals expansion so confidence remains at a strong level despite the slight decline.

Meanwhile, Housing Starts, which measure the start of construction on homes, rose by almost 1.4% in December to an annualized pace of 1.702 million homes. However, starts for single-family homes, which are the most important because they are in such high demand among buyers, fell by 2.3% from November to December and they were also nearly 11% lower than they were in December 2020.

On the positive front, Building Permits, which are a good forward-looking indicator for Housing Starts, increased for single-family homes and overall as well in December. Yet, one of the main takeaways is that the backlog of homes continues to grow. Homes authorized but not yet started increased by 1.1% and were up 44% year over year. Single-family homes authorized but not yet started were up nearly 39% year over year.

Rental prices were also on the rise, as CoreLogic’s Single-family Rent Report showed they increased 11.5% year over year in November – the fastest increase in over 16 years. All of the metros saw rental increases, but Miami was the clear leader with rental prices up 33%, showing the demand to escape to the warmer climates of Florida for the winter.

There was important news to note from the manufacturing sector. While the Philadelphia Fed Index showed that manufacturing grew more than expected in that region, the Empire State Index, which measures manufacturing activity for the New York region, fell sharply from 32 in December to -0.7 in January. This was well below the estimate of 25.

Was this decline in the New York region due to Omicron impacting supply chains, a hangover after the holidays, cost pressures or rising wages? It is likely a combination of all of these factors and is something we need to monitor, as it could be signaling a slowdown in our economy.

Omicron’s impact on the labor sector was also reflected in the latest Initial Jobless Claims figures, which reached the highest level since October. The number of people continuing to receive benefits after their initial claim also increased. There are now 2.128 million people in total receiving benefits, and while this is an increase of 180,000 in the latest week, it is still a stark contract to the nearly 17 million people receiving benefits in the comparable week the previous year.

Lastly, Wednesday’s 20-Year Bond Auction was met with above average demand. The bid to cover of 2.48 was higher than the one-year average of 2.36. Direct and indirect bidders took 83.2% of the auction compared to 79.1% in the previous 12.

Record Low Inventory of Existing Homes

 Existing Home Sales 1

Existing Home Sales, which measure closings on existing homes, fell by 4.6% from November to December to an annualized pace of 6.2 million units. On a year over year basis, sales were down 7.1%.

But the real story here is record-low inventory. There were only 910,000 homes for sale at the end of December, which is down significantly from the 1.1 million homes that were available at the end of November. Inventory is 14% lower than it was in December 2020 and a completely different picture compared to the bubble-like conditions we saw in 2007 when there were 3.7 million homes for sale.

Homes were only on the market for 19 days in December, even with higher prices and the lack of inventory, which speaks to the high demand for homes among potential buyers around the country. The real reason we saw sales decline is because there are not enough homes on the market. Quite simply, if there were more homes, there would be more sales. The ongoing tight supply and strong demand should be very supportive of home prices.

The median home price was reported at $358,000, which is up 15.8% year over year. Remember that the median home price is not the same as appreciation. It simply means half the homes sold were above that price and half were below it.

First-time homebuyers accounted for 30% of sales, which was a big rise from 26% in November’s report. Cash buyers declined slightly to 23% of transactions, down from 24% in November, while investors purchased 17% of homes, up from 15%. Foreclosures and short sales comprised less than 1% of all transactions.

Builder Confidence Ticks Lower But Remains Strong

 NAHB Housing Market Index 1

The National Association of Home Builders Housing Market Index, which is a real-time read on builder confidence, fell 1 point to 83 in January but remains at a strong level.

Any reading over 50 on this index, which runs from 0 to 100, signals expansion. For perspective, this index was at 80 last October, 83 in November and reached an all-time high of 90 in November 2020.

Looking at the components of the index, current sales conditions held steady at 90, sales expectations for the next six months fell 2 points to 83, and buyer traffic also dropped 2 points to 69.

NAHB Chairman, Chuck Fowke, noted that, “Higher material costs and lack of availability are adding weeks to typical single-family construction times. NAHB analysis indicates the aggregate cost of residential construction materials has increased almost 19% since December 2020.”

The bottom line is that the high demand for homes has kept builders confident even in the face of higher building material costs and the lack of skilled labor.

Housing Starts Move Higher But Construction Backlog Remains

 Housing Starts 1

Housing Starts, which measure the start of construction on homes, rose by almost 1.4% in December to an annualized pace of 1.702 million homes. This is 2.5% higher than December 2020.

However, starts for single-family homes, which are the most important because they are in such high demand among buyers, fell by 2.3% from November to December. They are also nearly 11% lower than they were in December 2020.

Building Permits, which are a good forward-looking indicator for Housing Starts, rose by 9.1% in December and they were also are up 6.5% year over year. Single-family permits also increased by 2%, but they were still down 8.5% annually.

One of the main takeaways is that the backlog of homes continues to grow. Completions fell by almost 9% in December and they were down 6.6% annually, speaking to the challenges builders are having with materials and labor.

In addition, homes authorized but not yet started increased by 1.1% and they were up 44% year over year. Single-family homes authorized but not yet started were up nearly 39% year over year.

Builders will continue to try to put more inventory on the market, but they are significantly lagging demand, especially on the single-family front. This ongoing imbalance in supply and demand should continue to be supportive of home prices.

Jobless Claims Rise in Latest Week

 Jobless Claims 1

The number of people filing for unemployment benefits for the first time reached the highest level since October, as Initial Jobless Claims rose 55,000 to 286,000. If we compare Initial Claims to just a few weeks ago, they are almost 100,000 higher.

Omicron certainly could have played a role in this increase, but it’s also an important week to keep in mind. This data is for the “sample” week that gets plugged into the Jobs Report estimates. As a result, the January Jobs Report could show higher unemployment when it is released on February 4.

Continuing Claims, which measure people who continue to receive benefits after their initial claim is filed, rose 84,000 to 1.635 million.

There are now 2.128 million people in total receiving benefits, and while this is an increase of 180,000 in the latest week, it is still a stark contract to the nearly 17 million people receiving benefits in the comparable week the previous year.

 What to Look for This Week

More housing news is ahead this week, beginning Tuesday when the latest home price appreciation figures for November from the Case-Shiller Home Price Index and the Federal Housing Finance Agency (FHFA) House Price Index are reported. New and Pending Home Sales for December follow on Wednesday and Thursday, respectively.

Also on Thursday, the latest Jobless Claims figures will be reported as usual, along with December’s Durable Goods Orders and the first reading on fourth quarter GDP.

Friday brings the Fed’s favorite measure of inflation, Personal Consumption Expenditures, as well as Personal Income and Personal Spending for December.

And speaking of the Fed, their two-day FOMC meeting begins Tuesday, with their Monetary Policy Statement releasing on Wednesday and this always has the potential to move the markets.

Technical Picture

Mortgage Bonds continued to rebound on Friday but were rejected from the important ceiling of resistance at the 102.198 Fibonacci level. If they are able to break above this level, there is a lot of room to the upside. The 10-year has started to break beneath support at 1.77%, which is a good sign. The next floor is at 1.69%, which means there is quite a bit of room for improvement. We are also seeing a positive stochastic crossover in Mortgage Bonds and a negative stochastic crossover in 10-year yields, which means there is some momentum behind us where we could see continued improvement if we can maintain these levels.

“Monday” Market Update – 1/18/2022

Mortgage Rates Increase Significantly

January 13, 2022

Mortgage rates rose across all mortgage loan types, with the 30-year fixed-rate mortgage increasing by almost a quarter of a percent from last week. This was driven by the prospect of a faster than expected tightening of monetary policy in response to continued inflation exacerbated by uncertainty in labor and supply chains. The rise in mortgage rates so far this year has not yet affected purchase demand, but given the fast pace of home price growth, it will likely dampen demand in the near future.

Opinions, estimates, forecasts, and other views contained in this document are those of Freddie Mac’s Economic & Housing Research group, do not necessarily represent the views of Freddie Mac or its management, and should not be construed as indicating Freddie Mac’s business prospects or expected results. Although the Economic & Housing Research group attempts to provide reliable, useful information, it does not guarantee that the information or other content in this document is accurate, current or suitable for any particular purpose. All content is subject to change without notice. All content is provided on an “as is” basis, with no warranties of any kind whatsoever. Information from this document may be used with proper attribution. Alteration of this document or its content is strictly prohibited. © 2022 by Freddie Mac.

Week of January 10, 2022 in Review

Inflation continues to set record highs and Fed Chair Jerome Powell made some notable remarks regarding the Fed’s stance on inflation. Plus, Jobless Claims hover at pre-pandemic levels as the labor market remains tight.

The Consumer Price Index (CPI) showed that consumer inflation rose by 0.5% in December while the year over year reading ticked higher from 6.8% to 7%! Core CPI, which strips out volatile food and energy prices, also rose on a monthly and annual basis.

Wholesale inflation increased in December as well, with the Producer Price Index (PPI) rising 0.2% from November. On a year over year basis, the index increased from 9.6% to 9.7%, which is a record high since the methodology for collecting this data was changed in 2010. Core PPI, which again strips out volatile food and energy prices, rose 0.5% in December, while the year over year figure rose from 7.7% to 8.3%, which is also a record.

The National Federation of Independent Business released important data that speaks to how inflation is impacting small businesses, while inflation may have also played a part in December’s weak Retail Sales figures, both of which are highlighted below.

Jerome Powell testified in front of Congress last week at his hearing for nomination to a second term as Fed Chair. Of particular note regarding inflation, he said, “We will use our tools to support the economy and a strong labor market and to prevent higher inflation from becoming entrenched.”

Rising inflation is critical to monitor because it can have a big impact on Mortgage Bonds and home loan rates, which are tied to them. Read more about this below.

In other news, Jobless Claims continue to hover near pre-pandemic levels. There are now just under 1.95 million people in total receiving benefits, which is a healthy number and in stark contrast to the 19 million plus seen in the comparable week last year. Finding labor remains one of the biggest challenges for employers, so they continue to hold onto their workers and reduce the pace of firings, which reflects the current tight labor market.

Lastly, Wednesday’s 10-year Note Auction was met with average demand and did not impact the markets much. Thursday’s 30-Year Bond auction was also met with average demand. The bid to cover of 2.35 was higher than the one-year average of 2.30. Direct and indirect bidders took 82.1% of the auction compared to 81.4% in the previous 12.

Consumer Inflation Remains Red Hot

The Consumer Price Index (CPI), which measures inflation on the consumer level, rose by 0.5% in December. This was in line with expectations and nudged the year over year reading higher from 6.8% to 7%.

Core CPI, which strips out volatile food and energy prices, rose by 0.6%, which was a bit hotter than expectations. As a result, year over year Core CPI jumped from 4.9% to 5.5%.

Within the report, rents rose 0.4% in December and increased from 3% to 3.3% on a year over year basis. While this data has started to increase, the CPI report is still not capturing the double digit increases year over year that many other rent reports are showing.

Owners’ equivalent rent increased 0.4% and the year over year figure rose from 3.5% to 3.8%. However, note that this data is based on a survey that asks homeowners, “If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?” Understandably, this is very subjective and many people would be guessing how much their home would rent for.

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. 

Wholesale Inflation Reaches Another Record High

The Producer Price Index (PPI), which measures inflation on the wholesale level, rose 0.2% in December, though this was half of expectations. On a year over year basis, the index increased from 9.6% to 9.7%, which is a record high since the methodology for collecting data was changed in 2010.

Core PPI, which again strips out volatile food and energy prices, rose 0.5% in December, coming in line with what was forecasted. However, the year over year figure was hotter than expectations and rose from 7.7% to 8.3%, which is another record.

Producer inflation continues to rise, which often leads to hotter consumer inflation levels, as producers pass those higher costs along to consumers.

Also of note, the Fed’s Beige Book showed that every district reported wage pressured inflation, many as much as 10%. This is another factor that contributes to higher producer prices, as they have to pay employees more to retain them.

Additionally, Cass Freight expenditures, which measures the total amount spent on freight by companies, rose to a new record, up 44% year over year. This also contributes to higher prices and producer inflation.

Small Businesses and Retailers Feeling Inflation Pressure

While the December National Federation of Independent Business Small Business Optimism Index rose slightly, the internals on inflation and compensation were most important.

Those expecting higher prices did fall 2 points to 57, but this reading is off the highest level in 43 years. In addition, 22% of companies say that inflation is the single most important problem in operating their business – the highest level in 41 years!

Positions not able to fill remained near record highs and as a result, the current compensation component rose to a fresh record at 48, compared to the average since 1984 at 22. Future compensation plans held at its record high. Employers are not able to find workers and are forced to pay their existing base and new talent more. This speaks to wage-pressured inflation.

Meanwhile, December’s Retail Sales were disappointing, especially given that December is usually a strong month for retail. Overall, sales were down 2% but Core sales, which strip out autos and gas, fell a sharp 3.1%. While some of this decline could be attributed to Omicron or people shopping early for the holidays due to supply chain issues, inflation may also be the main cause.

Since last March, the cost of goods has risen by 10.7%. If we don’t see a recovery in the upcoming reports as Omicron subsides, we will know that December’s decline in sales was due to inflation.

Fed Factors to Watch For

Jerome Powell testified at his re-nomination hearing that the Fed will “use our tools to support the economy and a strong labor market and to prevent higher inflation from becoming entrenched.”

The main tool the Fed uses to curb inflation is hiking its benchmark Fed Funds Rate, which is the interest rate for overnight borrowing for banks and it is not the same as mortgage rates. So counterintuitively, when the Fed hikes its benchmark Fed Funds Rate, this can be good for interest rates because it curbs inflation.

The Fed has previously said that they would not shock the markets by hiking their benchmark Fed Funds Rate and tapering their ongoing purchases of Treasuries and Mortgage-Backed Securities (MBS) at the same time. These are purchases that began back in 2020 during the heart of the pandemic to stabilize the markets and aid in our recovery. As inflation heated up last year, the Fed came under pressure to start tapering, or reducing, these purchases, which they are currently on pace to complete in March. This means they may begin hiking the Fed Funds Rate at or before the next FOMC meeting, which is in May.

Another important factor to note is that the Fed holds about $9 trillion in Mortgage Bonds and Treasuries, which means that they receive principal payments from those holdings which would normally reduce the amount of their balance sheet over time. Some of those securities would naturally mature as well.

But the Fed has been taking these proceeds and reinvesting them back into Mortgage Bonds, which has prevented their balance sheet from getting smaller. These reinvestments amount to a massive additional $70 billion per month.

The bottom line is that timing of when the Fed starts to hike the Fed Funds Rate and how they handle the reduction of their balance sheet will be critical to monitor in the months ahead, as these actions will certainly impact inflation, Mortgage Bonds and interest rates.

 Jobless Claims Remain Near Pre-Pandemic Levels

 Jobless Claims 1

Initial Jobless Claims moved higher in the latest week, as the number of people filing for unemployment benefits for the first time rose 23,000 to 230,000. Remember that since this reading shows the pace of firings and people filing for benefits, the lower the number the better. And despite the increase, this is still a low level of initial claims.

But the real story is Continuing Claims, which measure individuals who continue to receive benefits. They fell 194,000 to 1.56 million, meaning this data is now back at pre-pandemic levels.

There are now 1.95 million people in total receiving benefits, which is a healthy number and in stark contrast to the 19 million seen in the comparable week last year. While these numbers may still be influenced by the holidays, they do reflect that the labor market remains tight. Finding labor remains one of the biggest challenges for employers, so they continue to hold onto their workers and reduce the pace of firings.

What to Look for This Week

After the market closures Monday in honor of the Martin Luther King, Jr. holiday, housing reports will dominate headlines.

On Tuesday, we’ll get a read on how confident builders are feeling this month when the National Association of Home Builders releases its Housing Market Index. December Housing Starts and Building Permits will be reported on Wednesday, while Existing Home Sales data follows on Thursday.

We’ll also get an update on manufacturing for the New York region when the Empire State Index for January is released on Tuesday. The Philadelphia Fed Index follows on Thursday.

The latest Jobless Claims data will also be reported as usual on Thursday.

Technical Picture

After breaking beneath support at 102.344 on Friday, Mortgage Bonds continued to slide lower and tested the next floor at 102.198. The 10-year bounced higher off 1.71%, broke above the next ceiling at 1.76%, and has more room to go until the next ceiling at 1.82%. We must remain on guard as there is still more room for yields to move higher, which could pressure Mortgage Bonds lower.

Monday Market Update – 01/10/2021

Week of January 3, 2022 in Review

There was good news when it came to job growth in December – despite the disappointing headline figure from the Bureau of Labor Statistics. Home prices also continued to appreciate in November, but it was the minutes from the Fed’s December meeting that really added some fireworks to the markets last week.

The Bureau of Labor Statistics (BLS) reported that there were only 199,000 jobs created in December, which was half the job gains that were expected. However, there were positive revisions to the figures for October and November adding 141,000 new jobs in those months combined, which makes up for some of the miss on the headline figure. Yet this headline figure is far from the whole story when it comes to job growth in December, as explained below.

Private sector payrolls nearly doubled expectations in December, with the ADP Employment Report showing that there were 807,000 jobs created. Job gains were reported across all sizes of businesses. Both goods-producing and service-providing sector companies showed gains, with services contributing the majority share at 669,000 jobs.

On another positive sign, Jobless Claims remain near pre-pandemic levels with the number of first-time filers hovering near 52-year lows. There are now 1.722 million people in total receiving benefits, which is a healthy number and in stark contrast to the 20 million plus seen last year.

In housing news, CoreLogic’s Home Price Index report for November showed that home prices rose by 1.3% from October and 18.1% year over year. Detached homes appreciated at an even higher pace of 19.4% year over year. The ongoing dynamic of strong demand for homes and tight inventory remains supportive of home prices.

Meanwhile, Apartment List’s National Rent Report for December showed that rents were up almost 18% year over year, which is a record. However, the national index did fall by 0.2% in December, marking the only time rents declined month over month last year.

But perhaps the biggest news of last week came on Wednesday when the minutes from the Fed’s December meeting were released. Don’t miss the important details below.

More to the Jobs Report Than Meets the Eye

The Bureau of Labor Statistics (BLS) reported that there were only 199,000 jobs created in December, which was half the job gains that were expected. However, there were positive revisions to the figures for October and November adding 141,000 new jobs in those months combined, which makes up for some of the miss on the headline figure.

Yet this was a tale of two reports, as there are two surveys 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 651,000 job creations, while the labor force increased by almost 168,000. The number of unemployed people decreased by 483,000, causing the Unemployment Rate to fall from 4.2% to 3.9%.

Why was there a big disconnect between the two reports?

The Household Survey includes self-employed workers whose businesses are unincorporated, unpaid family workers, agricultural workers and private household workers who are excluded by the Business Survey. And with the big surge we’ve seen in self-employment, this could account for some of the disconnect.

The U-6 all-in Unemployment Rate improved from 7.7% to 7.3% and is more indicative of the true Unemployment Rate.

Average hourly and weekly earnings were both up roughly 4.7% year over year. Wage growth is running even hotter if you annualized the pace over the last six months at 6%. You have to look back to the 1990s to see wages growing at 6% year over year, which shows how tight the labor market is.

December Private Payrolls Nearly Double Expectations

The ADP Employment Report, which measures private sector payrolls, showed that there were 807,000 jobs created in December – almost double what economists had forecasted. While November’s figures were revised lower from 534,000 to 505,000 new jobs in that month, this was certainly a solid report.

Both goods-producing and service-providing sector companies showed gains, with services contributing the majority share at 669,000 jobs. Leisure and hospitality had the biggest gains with 246,000 jobs, followed by trade, transportation, and utilities at 138,000, and professional and business at 130,000. On the goods-producing side, construction also showed strong gains at 62,000.

Job gains were reported across all sizes of businesses, with the majority of those reported at large businesses. Small businesses (1-49 employees) gained 204,000 jobs, mid-sized businesses (50-499 employees) gained 214,000 jobs, and large businesses (500 or more employees) gained 389,000 jobs.

ADP’s Chief Economist, Nela Richardson, noted, “December’s job market strengthened as the fallout from the Delta variant faded and Omicron’s impact had yet to be seen.”

We will see if this means we will have a lower job growth figure for January when that data is released on February 2.

The bottom line is that of the 19.6 million private sector jobs lost in March and April 2020, we’ve since recovered about 15.6 million of them.

Initial Jobless Claims Remain Near 52-Year Low

The number of people filing for unemployment benefits for the first time ticked higher by 7,000 in the latest week, as Initial Jobless Claims were reported at 207,000. Note that this is still a low level of claims and not far off 52-year lows. Remember that since this reading shows the pace of firings and people filing for benefits, the lower the number the better.

Continuing Claims, which measures individuals who continue to receive benefits, rose 36,000 to 1.754 million, just off the previous week’s pandemic-era low.

There are now 1.722 million people in total receiving benefits, which is a healthy number and in stark contrast to the 20 million plus seen last year. It also reflects that the labor market remains tight. Employers are having a hard time finding new workers and are reducing their pace of firings.

Fed Minutes Move Markets

The Fed released the minutes from their December 15 meeting, which showed that they discussed reducing their balance sheet and that they are serious about removing accommodation more aggressively.

The Fed also discussed hiking their benchmark Fed Funds Rate faster and the market estimate is now showing a 76% chance of the first hike 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.

So, what does this mean?

Remember that back in 2020 during the heart of the pandemic, the Fed began buying $40 billion in Mortgage-Backed Securities (MBS) and $80 billion in Treasuries each month to inject liquidity into the markets and keep long-term rates lower. These ongoing purchases were meant to stabilize the markets and aid in our recovery.

As our recovery proceeded, the Fed came under pressure last year to start tapering, or reducing, these purchases. In their meeting last November, the Fed initially announced that they would begin tapering their purchases of MBS and Treasuries by $15 billion per month. However, in December the Fed decided to accelerate the reduction of their purchases of MBS and Treasuries from $15 billion per month to $30 billion. 

But what was unclear was how the Fed would handle their $8.8 trillion balance sheet, of which MBS and Treasuries make up roughly $8.3 trillion. The Fed receives money from the Bonds that they hold each month, which they have been reinvesting back into MBS. This has totaled roughly $70 billion per month, which has prevented their balance sheet from running off or reducing over time.

In the minutes from December’s meeting, almost all participants said they want to reduce their balance sheet shortly after the Fed Funds Rate hike, which likely means sometime between April and June. They also discussed letting MBS run off faster than Treasuries. The last time the Fed went through a tightening cycle, they waited two years to reduce their balance sheet, which is something they addressed and said they don’t want to do this time around.

What are the Fed’s options?

They could sell MBS and Treasuries, stop reinvestments altogether, or allow some fixed amount to fall off each month. With their intention to not spook the markets too much, they will likely choose the latter. Their comments showed many supported having monthly caps on the reduction, which is what we would expect.

The Fed addressing their balance sheet is what really impacted the equity and Bond markets last week. The timing of when the Fed hikes its benchmark Fed Funds Rate and when it reduces its balance sheet will certainly impact both Mortgage Bonds and mortgage rates this year – and will be something to closely monitor in the months ahead.

Home Price Appreciation Continues

CoreLogic released their Home Price Index report for November, showing that home prices rose by 1.3% from October and 18.1% year over year. Detached homes appreciated at an even higher pace of 19.4% year over year.

Within the report, the hottest markets were Phoenix (+31%), Las Vegas (+24%), and

San Diego (+22%).

CoreLogic forecasts that home prices will remain flat in December and appreciate 2.8% in the year going forward. Yet, they remain conservative in their forecasting and continue to miss on the low side. For example, CoreLogic had forecasted prices for November would rise by 0.2% from October and they actually increased by 1.3%.

Even though CoreLogic only forecasts a 2.8% gain in home prices over the next year, they are certainly the outlier compared to other forecasts. Goldman Sachs expects 16% gains, Zillow anticipates 14%, and Fannie Mae sees prices rising by roughly 7.5%. Mid to high single digit appreciation is definitely attainable and is still very meaningful for wealth creation. For example, a $400,000 home that appreciated by 8% would result in $32,000 in appreciation gain in just one year.

And of note, Apartment List released its National Rent Report for December, which showed that rents were up a record almost 18% year over year. To put this in context, annual rent growth averaged just 2.3% in the pre-pandemic years from 2017-2019. However, the national index did fall by 0.2% in December, marking the only time rents declined month over month last year. While December’s monthly reading could include some seasonality, it will be important to see if there are any more signs of slower pricing pressures.

What to Look for This Week

The week kicks off on Tuesday with an update on how small businesses are feeling when the National Federation of Independent Business Small Business Optimism Index for December is reported.

Then, all eyes will be on two critical inflation reports when December’s Consumer Price Index is released on Wednesday, followed by the Producer Price Index on Thursday.

The latest Jobless Claims figures will also be reported on Thursday, while December’s Retail Sales will be delivered on Friday.

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 have broken beneath support at 100.90, which is a negative sign. They are trading in an extremely wide range with 100.90 acting as a ceiling and 99.80 acting as our next floor of support.

Monday Market Update – 01/03/2021

Week of December 27, 2021 in Review

The last economic reports of 2021 showed that home prices continue to rise, while jobless claims reflect healthy, pre-pandemic levels.

The high demand for homes around the country continues to help prices appreciate. The Case-Shiller Home Price Index showed that home prices rose 0.8% in October and 19.1% year over year. This annual reading was slightly lower than the 19.7% rise reported for September.

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 1.1% in October and 17.4% when compared to October 2020. The annual reading again was just below 17.7% from the previous report.

While the year over year appreciation figures are declining, this does not mean home prices are moving lower. Don’t miss our important expectation below.

Pending Home Sales, which measures signed contracts on existing homes, fell 2.2% in November. This was short of the 0.5% expected increase. Sales are now down 2.7% year over year but are still quite strong when considering the lack of inventory and tough comparisons to last year due to the pandemic.

There was good news from the labor sector, as Jobless Claims continue to reflect pre-pandemic levels. The number of people filing for unemployment benefits for the first time fell by 8,000 in the latest week, as Initial Jobless Claims were reported at 198,000, which is near a 52-year low. Continuing Claims, which measures individuals who continue to receive benefits, decreased 140,000 to 1.716 million, once again reaching a pandemic-era low.

There are now 2.177 million people in total receiving benefits, which is a healthy number and in stark contrast to the 20 million plus seen last year.

And of note, investors were closely watching two auctions for the level of demand. Tuesday’s 5-Year Treasury Note auction was met with above average demand. The bid to cover of 2.41 was higher than the one-year average of 2.37. Direct and indirect bidders took 80% of the auction compared to 76% in the previous 12. However, Wednesday’s 7-Year Note auction was met with below average demand. The bid to cover of 2.21 was lower than the 1-year average of 2.29. Direct and indirect bidders took 78.8% of the auction compared to 78.1% in the previous 12.

What’s Really Going on With Home Price Appreciation?

The Case-Shiller Home Price Index, which is considered the “gold standard” for appreciation, showed home prices rose 0.8% in October and 19.1% year over year. This annual reading was slightly lower than the 19.7% rise reported for September.

So, why are the year over year appreciation figures declining? Does this mean home prices are moving lower?

The pace of appreciation month over month is decelerating, but we are still seeing home price gains. For example, in October 2020 home prices rose 1.51% while in October 2021 they rose 0.8%. Because the data for October 2021 shows a slower pace of appreciation then what was reported for October 2020, the year over year figure declined. But home prices are still rising.

The top three performing cities were Phoenix (+32%), Tampa (+28%) and Miami (+26%). Even the three worst-performing cities, including Chicago, Minneapolis, and Washington, saw 11.5% to 12% gains.

The Federal Housing Finance Agency (FHFA) 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 1.1% in October and were up 17.4% year over year. This is down from the 17.7% year over year reading reported for September.

Pending Home Sales Decline in November

Pending Home Sales, which measures signed contracts on existing homes, fell 2.2% in November, which was short of the 0.5% expected increase. Sales are now down 2.7% year over year but are still quite strong when considering the lack of inventory and tough comparisons to last year due to the pandemic.

Lawrence Yun, chief economist for the National Association of Realtors, said, “There was less pending home sales action this time around, which I would ascribe to low housing supply, but also to buyers being hesitant about home prices.” He added, “While I expect neither a price reduction, nor another year of record-pace price gains, the market will see more inventory in 2022 and that will help some consumers with affordability.”

Yun also noted that housing demand remains high, and that homes placed on the market for sale go from “listed status” to “under contract” in approximately 18 days.

Initial Jobless Claims Near 52-Year Low

The number of people filing for unemployment benefits for the first time fell by 8,000 in the latest week, as Initial Jobless Claims were reported at 198,000. Remember that since this reading reflects the pace of firings and people filing for benefits, the lower the number the better.

Continuing Claims, which measures individuals who continue to receive benefits, decreased 140,000 to 1.716 million, once again reaching a pandemic-era low.

There are now 2.177 million people in total receiving benefits, which is a healthy number and in stark contrast to the 20 million plus seen last year. It also reflects that employers are having a hard time finding new workers and are reducing their pace of firings.

What to Look for This Week

Labor sector news will dominate the headlines during the first full week of 2022. On Wednesday, the ADP Employment Report will give us an update on private payrolls for December. Thursday brings the latest Initial Jobless Claims data. Then ending the week on Friday, the highly anticipated Bureau of Labor Statistics Jobs Report for December will be released, which includes Non-farm Payrolls and the Unemployment Rate.

Also of note, we’ll get an update on manufacturing when the ISM Index for December is reported on Tuesday. Tuesday also brings more news on home price appreciation when CoreLogic releases its November Home Price Index report, Plus, the minutes from the Fed’s December meeting will be released on Wednesday.

Technical Picture

Mortgage Bonds rebounded late last week and ended 2021 in a range between support at 101.79 and a ceiling of resistance at their 25-day Moving Average. The 10-year broke beneath its 50-day Moving Average and is now trading in a range beneath it and a floor at the 200-day Moving Average.