For the seventh week in a row, mortgage rates continued to climb toward eight percent, resulting in the longest consecutive rise since the Spring of 2022. Rates have risen two full percentage points in 2023 alone and, as we head into Halloween, the impacts may scare potential homebuyers. Purchase activity has slowed to a virtual standstill, affordability remains a significant hurdle for many and the only way to address it is lower rates and greater inventory.

So, how do we create inventory? The same pain points that have impacted buyers and sellers are still taking place. People are still getting married, having babies, relocating, wanting another bedroom or bathroom or want to be in a different school district. So, how do we get them to list their home for sale or buy a first home? Education. Now, more than ever, our clients and prospects need us to help guide them through these times of uncertainty.

You’ve heard me hear talk about the mismatch in inventory versus those who want to buy. That is not going away anytime soon. We cannot build our way out of this imbalance. Selling a smaller house with significant equity to purchase something larger, in a better neighborhood or with better schools, could lead to a better overall financial situation for your clients. The calculations that I have run on a move-up could actually result in a substantial increase to overall net worth for your prospects. It could also allow them to pay off revolving debts that have much higher rates these days thanks to the Fed’s moves on the overnight rate and therefore the Prime Rate. This is the rate that controls rates for credit cards, student loans, HELOCs, car loans and other consumer loans.

That type of education doesn’t take place in one conversation. It requires a deep understanding of what our clients and prospects want and need. Learning the motivation to sell and buy is where our businesses are going to center in this “Higher for longer” paradigm that the Fed and financial market makers are suggesting we’ll be in for a while. Have those conversations. Ask the questions. Learn what your clients are experiencing and then be the solution to the pain they may be experiencing. The days of order taking are over. We need to be sales people.

Need to educate your clients? Want to have a first time buyer or move-up buyer class? Let’s do it! Call me today and let’s plan something that will give our clients and prospects what they need. 650-207-4364 or send me an email to chris@yourlenderchris.com

• Current Mortgage Rates Data Since 1971xlsx

Primary Mortgage Market Survey® U.S. weekly averages as of October 26, 2023

Week of October 23, 2023 in Review

Consumer inflation continued to inch lower in September, while signed contracts for new and existing homes were better than expected, showing resiliency in the housing market. Read on for last week’s headlines:

• Inflation Inching Lower
• Pending Home Sales Perk Up in September
• Big Rebound in New Home Sales
• Third Quarter GDP Better Than Expected
• Jobless Claims Suggest Slowdown in Hiring

Inflation Inching Lower

What’s the bottom line? September’s Personal Consumption Expenditures (PCE) showed that headline inflation increased by 0.4%, with the year-over-year reading holding steady at 3.4%. Core PCE, the Fed’s preferred method which strips out volatile food and energy prices, rose by 0.3% in September. The year-over-year reading fell from 3.8% to 3.7% – the lowest level in two years.

Inflation has made significant progress lower after peaking last year, with the headline reading at 3.4% (down from 7.1%) and the core reading at 3.7% (down from 5.6%). Plus, if we annualize the last six months’ worth of Core PCE readings (which the Fed did during their last meeting), Core PCE is even lower at 2.8%. While this is still above the Fed’s 2% target, it’s moving in the right direction.

Remember, the Fed has been hiking its benchmark Fed Funds Rate (which is the overnight borrowing rate for banks) to try to slow the economy and curb inflation. Their latest hike in July was the eleventh since March of last year, pushing the Fed Funds Rate to the highest level in 22 years. The Fed did not hike at their September meeting, so they could continue to assess incoming inflation, labor sector and other economic data.

Will the progress we’ve seen be enough for the Fed to pause rate hikes once again at their meeting this week? We’ll find out on Wednesday. 

Pending Home Sales Perk Up in September

Pending Home Sales rose 1.1% from August to September, much stronger than the 2% decline that was expected, though sales were 11% below the level seen a year earlier. This data measures signed contracts on existing homes, making it a forward-looking indicator for closings as measured by Existing Home Sales.

What’s the bottom line? While September’s boost in signed contracts shows resiliency in the housing market, they remain at “historically low levels” per Lawrence Yun, chief economist for the National Association of REALTORS�. Elevated mortgage rates have certainly caused many buyers to press pause on the home search, but tight inventory remains a key challenge as well. Yun stressed that increased supply is crucial to “get the overall housing market moving.”

Big Rebound in New Home Sales 

New Home Sales, which measure signed contracts on new homes, rose 12.3% from August to September to a 759,000-unit annualized pace. This was much stronger than estimates and the highest level in a year, with sales up nearly 34% since last September. 

What’s the bottom line? The lack of existing homes for sale has caused many buyers to explore new construction options. Yet, more “available” supply is needed to meet demand, as only 75,000 of the 435,000 new homes available for sale at the end of September were completed. The rest were either under construction or not even started yet.

The tight supply of both existing and new homes will continue to be supportive of home prices. On that note, the median sales price for new homes was $418,800, which was down from $477,700 a year ago. While this may sound like home prices are declining, this figure is not the same as appreciation but represents the mid-price and can be skewed by the mix of sales among lower-priced and higher-priced homes.

Danushka Nanayakkara-Skillington, assistant vice president for forecasting and analysis for the National Association of Home Builders, explained, “To compensate for this high interest rate environment, more builders are building smaller homes, which has resulted in a decline in the median new home price.”

Third Quarter GDP Better Than Expected

The first reading of third quarter 2023 Gross Domestic Product (GDP) showed that the U.S. economy grew by 4.9%, higher than estimates, thanks in large part to the increase in consumer spending, inventories and government spending. Note that this data is subject to revision when the second and final readings are released on November 29 and December 21, respectively.

What’s the bottom line? GDP functions as a scorecard for the country’s economic health, so the strong reading in the third quarter seems promising. However, the increased spending seen over the summer months may not be sustainable, which could mean we’ll see a slowdown in GDP for the fourth quarter of this year.

Jobless Claims Suggest Slowdown in Hiring

Initial Jobless Claims rose by 10,000 in the latest week, with 210,000 people filing for unemployment benefits for the first time. Despite this weekly increase, the number of first-time filers remains near the lowest levels seen this year. The real story is Continuing Claims, which increased 63,000, showing that 1.79 million people are still receiving benefits after filing their initial claim. 

What’s the bottom line? The low number of Initial Jobless Claims show that employers are trying to hold on to workers. Yet, Continuing Claims have now risen for six straight weeks. This suggests that it’s becoming harder for people to find employment once they are let go, indicating that hiring may be slowing down.

What to Look for This Week

Tuesday brings an update on home price appreciation for August via Case-Shiller and the Federal Housing Finance Agency.

Labor sector reports will also make headlines, starting Wednesday with job openings via the JOLTS report for September and ADP’s Employment Report (which measures private payrolls) for October. The latest Jobless Claims will be reported on Thursday, while Friday brings October’s Jobs Report from the Bureau of Labor Statistics, which includes Non-farm Payrolls and the Unemployment Rate.

But perhaps the biggest news will stem from the Fed’s two-day meeting which begins Tuesday, with their Monetary Policy Statement and press conference coming on Wednesday. Will the Fed once again pause hikes to the Fed Funds Rate?

Technical Picture

Mortgage Bonds broke above the ceiling at 99.316 last Friday. If they can stay above this level, the next ceiling is 99.697. However, if they move lower, we must remain on guard because the next floor is all the way down at 98.5. The 10-year ended last week trading in the middle of a range between resistance at 5% and support at 4.71%.

Primary Mortgage Market Survey® U.S. weekly averages as of October 19, 2023

Mortgage rates continued to approach eight percent this past week, further impacting affordability. With research showing down payment is the single largest barrier to first-time homebuyers will be interested to hear of the new loan program loanDepot launched this week–AccessZero. Ideal for first time (and repeat) homebuyers, it offers 3.5% or 5% down payment assistance structured as a repayable second mortgage with a 10-year term. Call me today to learn more about this unique program that is only being offered by loanDepot.

Not only are homebuyers feeling the impact of rising rates, but home builders are as well. Incoming data shows that the construction of new homes rebounded in September but as rates keep rising, home builders appear to be losing confidence. As a result, construction could trend down in the short-term.

• Current Mortgage Rates Data Since 1971xlsx

Week of October 16, 2023 in Review

Tight housing inventory and elevated mortgage rates remain key headwinds for homebuyers and home builders. Plus, there was more Fed chatter about rates and the labor sector “WARNing” you need to know about. Here are the headlines:

• “Pressing Need” for More Housing Inventory
• Housing Starts Rise but Is a Pullback Ahead?
• Home Builder Confidence “Hammered” by Elevated Rates
• More Signs of a Fed Rate Hike Pause?
• “WARNing” Ahead for Jobless Claims?

“Pressing Need” for More Housing Inventory

Existing Home Sales fell 2% from August to September to a 3.96-million-unit annualized pace, reaching a 13-year low, per the National Association of REALTORS� (NAR). Sales were also 15.4% lower than they were in September of last year. This report measures closings on existing homes and is a critical gauge for taking the pulse of the housing sector.     

What’s the bottom line? Tight inventory and elevated mortgage rates remain key constraints on home sales. There were 1.13 million homes available for sale at the end of September, down from 1.23 million a year earlier and nearly half the levels seen in 2019. Plus, inventory is even tighter than that figure implies, as many homes counted in existing inventory are under contract and not truly available for purchase. In fact, there were only 702,000 “active listings” at the end of last month.

NAR’s Chief Economist, Lawrence Yun, noted that “there was a “pressing need for more housing supply.” Yet despite ongoing inventory constraints, homes continue to sell quickly (averaging just 21 days on the market). And 69% of homes sold in less than a month, showing that demand is strong for what’s out there.

Housing Starts Rise but Is a Pullback Ahead?

Housing Starts (which measure the start of construction on homes) rebounded in September after reaching two-year lows in August, up 7% for the month. While the bulk of the increase came in multi-family units, starts for single-family homes also rose 3.2%. Building Permits, which are indicative of future supply, did decline 4.4% from August while permits for single-family homes reached their highest level in a year.   

What’s the bottom line? Alicia Huey, NAHB Chair, noted that the uptick in single-family construction “was somewhat unexpected” as elevated mortgage rates have dampened home builder confidence. She added that “starts are likely to weaken in the months ahead,” which would further impact already tight supply.

In fact, when we look at the pace of completed homes that will be coming to market (around 1.45 million homes annualized) and subtract roughly 100,000 homes that need to be replaced every year due to aging, we’re well below demand as measured by household formations that are trending at 2 million. Even looking at future supply (Building Permits at 1.47 million annualized), we’re still lower than where we need to be.

The bottom line is that more demand than supply will continue to be supportive of home values.

Home Builder Confidence “Hammered” by Elevated Rates

The National Association of Home Builders (NAHB) Housing Market Index fell four points to 40 in October, keeping builder sentiment below the key breakeven level of 50. This marks the third straight monthly decline, with confidence at the lowest level since January. All three components of the index moved lower, with current sales conditions dipping four points to 46, future sales expectations down five points to 44, and buyer traffic falling four points to 26.   

What’s the bottom line? Rising mortgage rates was a key reason cited for declining confidence, as “builders have reported lower levels of buyer traffic” per NAHB Chair Alicia Huey. Higher rates have also impacted builder costs, further eroding sentiment. But there was a glimmer of good news for potential buyers – 32% of builders reported cutting prices, matching last month for the largest percentage since last December.

More Signs of a Fed Rate Hike Pause?

There has been a growing chorus of Fed members who are inclined to hold rates steady at their next meeting on November 1, given the progress made toward taming inflation and tightening conditions. This includes New York Fed President John Williams, Vice Chair Michael Barr, Fed Governors Phillip Jefferson and Christopher Waller, Atlanta Fed President Raphael Bostic, San Francisco Fed President Mary Daly, Dallas Fed President Lorie Logan and Philadelphia Fed President Patrick Harker.

Remember, the Fed has been hiking its benchmark Fed Funds Rate (which is the overnight borrowing rate for banks) to try to slow the economy and curb inflation.

Their latest hike in July was the eleventh since March of last year, pushing the Fed Funds Rate to the highest level in 22 years. The Fed did not hike at their September meeting, so they could continue to assess incoming inflation, labor sector and other economic data.

What’s the bottom line? Last week, Fed Chair Jerome Powell stressed that the Fed is “proceeding carefully” as they walk the line between doing too much and doing too little to get inflation back down to their 2% target. However, he made it clear that additional rate hikes could still be ahead if strong economic data undermines the progress made on inflation.

“WARNing” Ahead for Jobless Claims?

Initial Jobless Claims fell by 13,000 in the latest week, with 198,000 people filing for unemployment benefits for the first time. This is the second lowest level of the year and marks the first time since January that claims have fallen below 200,000, suggesting that employers are holding on to workers.

However, Continuing Claims increased 29,000, as 1.734 million people are still receiving benefits after filing their initial claim. This data has moved higher over the last few weeks, indicating that it’s becoming harder for people to find employment once they’re let go.

What’s the bottom line? While Initial Jobless Claims have been on a downward trend since hitting 250,000 at the start of August, a recent rise in announced layoffs via “WARN” notices could lead to a reversal higher in unemployment filings. The Worker Adjustment and Retraining Notification Act (WARN) is an important consumer protection that requires employers with 100 or more employees to provide at least 60 calendar days advance written notice of a plant closing and mass layoff affecting 50 or more employees at a single site of employment.

What to Look for This Week

More housing data is ahead, with September’s New and Pending Home Sales releasing on Wednesday and Thursday, respectively. Also on Thursday, look for the latest Jobless Claims and the first reading for third quarter GDP. A crucial inflation reading will be delivered on Friday via the Fed’s favored measure, Personal Consumption Expenditures.

Technical Picture

Mortgage Bonds moved higher on Friday, which is a welcome sign, as they have been oversold and are due for a rebound. Support can be found at 98.5, while the next ceiling of resistance is all the way up at the 99.697 Fibonacci level, so there is quite a bit of room for improvement. The 10-year tested resistance at 5%, which held, and yields ended the week trading around 4.90%, with the next floor at 4.67%.