Mortgage Rates Hit Five Percent

Freddie Mac Primary Mortgage Market Survey as of April 14, 2022

This week, mortgage rates averaged five percent for the first time in over a decade. As Americans contend with historically high inflation, the combination of rising mortgage rates, elevated home prices and tight inventory are making the pursuit of homeownership the most expensive in a generation. Anecdotally, I was out over the weekend at a couple of open houses and spoke with buyers shopping for their next or first home. What I heard was frustration. Offers written and not accepted. Rates squeezing purchase pricing. Lack of inventory. Yes, rates are on the rise but please consider two things, the first is that rates are still historically low. The second is that we are finally beginning to see inventory build. In fact, I read a recent statistic in Realtor.com Spring Seller Report that said 64% of those planning to sell this year will list by August. The inventory is coming!

• Current Mortgage Rates Data Since 1971 xls

Week of April 11, 2022 in Review

Consumer and wholesale inflation were red hot in March. How did this impact consumer spending and small businesses?

The Consumer Price Index (CPI) showed that consumer inflation increased by 1.2% in March while the year over year reading rose from 7.9% to 8.5%, which is the hottest reading in 41 years! Core CPI, which strips out volatile food and energy prices, rose by 0.3%. On an annual basis, Core CPI increased from 6.4% to 6.5%, which was a bit less than anticipated. While the headline inflation jump was expected due to rising oil and food prices, the Core reading was cooler than anticipated and garnered a positive reaction in the Bond market when the data was released last Tuesday.

Wholesale inflation also remains red hot, as the Producer Price Index (PPI) rose 1.4% in March. On a year over year basis, PPI rose from 10.3% to 11.2%, which is the highest level on record since the methodology for collecting data was changed in 2010.

Core PPI, which also strips out food and energy prices, doubled expectations with a 1% increase in March. The year over year figure increased from 8.7% to 9.2%. Elevated producer inflation can lead to hotter consumer inflation levels, as producers can pass those higher costs along to consumers.

Despite the rise in inflation, consumers continued to spend in March as Retail Sales rose 0.5%, just below the 0.6% expected gain. Sales in January were also revised higher from a 0.3% monthly rise to 0.8%.

Small business owners also reported that inflation was the biggest problem in March, per the National Federation of Independent Business Small Business Optimism Index. Within the report, companies that expect higher selling prices rose another 4 points to 72%, which is the highest on record dating back to 1980. In addition, 50% of companies reported plans to raise prices going forward.

Over in the labor sector, the number of people filing for benefits for the first time increased by 18,000 in the latest week, as there were 185,000 Initial Jobless Claims. However, this is coming off a near 54-year low in the previous week, so a bounce higher is understandable. There are now 1.703 million people in total receiving benefits, which is a stark contrast to the 17 million people receiving benefits in the comparable week last year. The labor market remains tight as employers are holding on to their workers and firing less.

Meanwhile, the Cass Freight Index, which is a monthly measure of the North American freight market, showed that freight volumes slowed from 3.6% year over year in February to 0.6% in March. Shipments were up almost 3%, but Cass Freight said this is 100 basis points below the normal seasonal pattern. All goods in the U.S. travel along some type of freight so it will be important to see if this slowdown is an early sign of a potential turning point, as this report has been another early recession indicator in the past.

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

Consumer Inflation Hits Highest Level Since 1981

The Consumer Price Index (CPI), which measures inflation on the consumer level, rose by 1.2% in March. This pushed the year over year reading higher from 7.9% to 8.5%, which is the hottest reading in 41 years. 

Core (CPI), which strips out volatile food and energy prices, rose by 0.3%. As a result, year over year Core CPI increased from 6.4% to 6.5%, which was a bit less than anticipated. The headline inflation jump was expected due to rising oil and food prices, but the Core reading was cooler than anticipated and garnered a positive reaction in the Bond market when the data was released last Tuesday.

Within the report, rents rose 0.4% in March and increased from 4.2% to 4.4% 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 also increased 0.4% and the year over year figure rose from 4.3% to 4.5%. 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 these amounts so while this data tries to capture the rise in home prices, it does a poor job.

Some other notable price increases since last year include food (+9%), gasoline (+48%) and used cars (+35%).

Why is rising inflation significant?

Besides causing higher prices, inflation is the arch enemy of fixed investments like Mortgage Bonds because it erodes the buying power of a Bond’s fixed rate of return. If inflation is rising, investors demand a rate of return to combat the faster pace of erosion due to inflation, causing interest rates to rise as we’ve seen this year.

Wholesale Inflation Hits New Record High

The Producer Price Index, which measures inflation on the wholesale level, rose 1.4% in March, which was hotter than expectations of 1.1%. On a year over year basis, PPI rose from 10.3% to 11.2%, which is the highest level on record since the methodology for collecting data was changed in 2010.

Core PPI, which also strips out food and energy prices, doubled expectations with a 1% increase in March. The year over year figure increased from 8.7% to 9.2%.

Producer inflation remains elevated, which often leads to hotter consumer inflation levels, as producers pass those higher costs along to consumers. And as noted below, about 50% of the companies surveyed by the NFIB expect future price hikes.

Small Business Owners Report Inflation Is Their Biggest Challenge

March’s National Federation of Independent Business Small Business Optimism Index showed that small businesses grew less optimistic last month, as the index fell to the weakest level in two years.

Small business owners reported that inflation is the biggest problem right now, followed by ongoing staffing shortages and supply chain disruptions. As a result, companies that expect higher selling prices rose another 4 points to 72%, which is the highest in the survey’s history. In addition, 50% of owners reported plans to raise prices going forward.

In addition, owners expecting better business conditions over the next six months fell 14 points to a -49%, which is the lowest level since the beginning of the survey in 1973. Given that we have experienced several recessions, a housing bubble and the COVID pandemic over the last 50 years, the fact that owners are feeling so negative right now could be yet another indicator that we may be headed for a recession.

Jobless Claims Show Labor Market Remains Tight

Initial Jobless Claims ticked higher in the latest week, as the number of people filing for benefits for the first time increased by 18,000 to 185,000. However, this is coming off a near 54-year low in the previous week, so a bounce higher is understandable.

Continuing Claims, which measure people who continue to receive benefits after their initial claim is filed, fell by 48,000 to 1.475 million.

There are now 1.703 million people in total receiving benefits, which is a decline of nearly 20,000 from the previous week and even more importantly a stark contrast to the 17 million people receiving benefits in the comparable week last year.

The story here remains the same: The labor market remains tight as employers are holding on to their workers and firing less.

The Scoop on Key Auctions

Investors were closely watching Tuesday’s 10-year Treasury Note auction and Wednesday’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.

Tuesday’s 10-year Note auction was met with below average demand. The bid to cover of 2.43 was below the one-year average of 2.50. Direct and indirect bidders took 81.3% of the auction compared to 85.2% in the previous 12. After the weak auction, yields gave back some of their move lower, but still ended the day lower.

Wednesday’s 30-year Bond auction was met with average demand. The bid to cover of 2.30 was just under the one-year average of 2.31. Direct and indirect bidders took 84.1% compared to 82.4% in the previous 12.

What to Look for This Week

Housing news dominates this week’s economic calendar, beginning Monday with the National Association of Home Builders Housing Market Index for April, which will give us a near real-time read on builder confidence.

On Tuesday, we’ll get a look at March’s Housing Starts and Building Permits, while Wednesday brings March’s Existing Home Sales.

On Thursday, the latest Jobless Claims data will be reported as usual.

Technical Picture

Mortgage Bonds moved sharply lower on Thursday and ended last week sitting on an important floor at 100.00. The 10-year broke above resistance at 2.766% and ended last week trading at around 2.82%, which is the highest level since 2018. The markets were closed Friday in observance of Good Friday.

Mortgage Rates Exceed Four and a Half Percent

March 31, 2022

Mortgage rates continued moving upward in the face of rising inflation as well as the prospect of strong demand for goods and ongoing supply disruptions. Purchase demand has weakened modestly but has continued to outpace expectations. This is largely due to unmet demand from first-time homebuyers as well as a select few who had been waiting for rates to hit a cyclical low.

• Current Mortgage Rates Data Since 1971 xls

Week of March 28, 2022 in Review

Jobs creations were strong in March, while home prices continue to appreciate and inflation continues to soar. Plus, learn what’s happening with a key recession indicator.

The Bureau of Labor Statistics (BLS) reported that there were 431,000 new jobs created in March, and though this was slightly below estimates of nearly 500,000 new jobs, it is still a strong number. In addition, there were positive revisions to the data for January and February adding 95,000 new jobs in those months combined, which more than makes up for the miss. Plus, the Unemployment Rate declined from 3.8% to 3.6%, which is almost back to the pre-pandemic low of 3.5%.

The ADP Employment Report showed that private sector payrolls came in just above expectations with 455,000 jobs created in March. Positive revisions to February’s data also added to the strength of the report. 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 377,000 jobs.

Jobless Claims are also at very strong pre-pandemic levels, showing that the labor market remains tight as employers are holding on to their workers and firing less. There are now 1.776 million people in total receiving benefits, which is a decline of nearly 82,000 from the previous week and even more importantly a stark contrast to the 18.5 million people receiving benefits in the comparable week last year.

The Fed’s favorite measure of inflation, Personal Consumption Expenditures (PCE), showed that headline inflation rose 0.6% in February, which was in line with expectations. Year over year, the index increased from 6% to 6.4%, which is the hottest level in 40 years! Core PCE, which strips out volatile food and energy prices and is the Fed’s real focus, was up 0.4% while the year over year reading increased from 5.2% to 5.4%.

Rising inflation is crucial to monitor because it can impact both Mortgage Bonds and mortgage rates, as explained below.

In housing news, tight supply continues to be supportive of home price appreciation. The Case-Shiller Home Price Index showed home prices rose 1.1% in January and 19.2% 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 1.6% in January and they were up 18.2% year over year.

Rents also continue to rise per Apartment List’s National Rent Report, which showed that rents rose 0.8% in March. Year over year rents were up a staggering 17.1%, though this is down from 17.6%. To put this in context, annual rent growth averaged just 2.3% in the pre-pandemic years from 2017-2019.

Also of note, the third estimate of Gross Domestic Product (GDP) for the fourth quarter of last year showed that the US economy grew by 6.9% on an annualized basis, which was lower than expectations of 7.1%.

Lastly, the spread between the 10-year and 2-year Treasury inverted for a brief time last week. This is significant because an inverted yield curve has been a reliable recession indicator historically. Don’t miss our crucial explanation about this below.

 Strong Job Creations in March

The Bureau of Labor Statistics (BLS) reported that there were 431,000 jobs created in March, though this was less than expectations of nearly 500,000 jobs. However, there were positive revisions to the data for January and February adding 95,000 new jobs in those months combined, which more than makes up for the miss.

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 736,000 job creations, while the labor force increased by 418,000. The Unemployment Rate declined from 3.8% to 3.6%, which is almost back to the pre-pandemic low of 3.5%.

The U-6 all-in unemployment rate, which is more indicative of the true unemployment rate, decreased from 7.2% to 6.9%. It is now back at the levels we saw in January 2020 before the pandemic began.

Average hourly earnings rose by 0.4% in March and they were up 5.6% year over year. Average weekly earnings were up 0.1% due to less hours worked. On an annual basis, they were up 4.6%.

And of note, a disproportionate number of new jobs came from 16-19-year-olds, and those workers typically work less hours and are not paid as much.

March Private Payrolls Beat Expectations

The ADP Employment Report, which measures private sector payrolls, showed that there were 455,000 jobs created in March, just above the 450,000 job gains that were expected. In addition, February’s figures were revised slightly higher from 475,000 to 486,000 new jobs in that month, adding to the strength of the report.

Both goods-producing and service-providing sector companies showed gains in March, with services contributing the majority share at 377,000 jobs. Leisure and hospitality had the biggest gains with 161,000 jobs, followed by education and health at 72,000, and professional and business at 61,000. On the goods-producing side, manufacturing also showed strong gains at 54,000.

Job gains were reported across all sizes of businesses, with mid-sized and large businesses seeing a near-equal share of the most gains. Small businesses (1-49 employees) gained 90,000 jobs, mid-sized businesses (50-499 employees) gained 188,000 jobs, and large businesses (500 or more employees) gained 177,000 jobs.

Initial Jobless Claims Tick Higher

The number of people filing for unemployment benefits for the first time rose by 14,000 in the latest week, as 202,000 Initial Jobless Claims were reported. However, this follows the lowest reading in almost 53 years from the previous week, so a bounce higher is understandable.

Continuing Claims, which measure people who continue to receive benefits after their initial claim is filed, fell by 35,000 to 1.307 million. This is a low going back to 1969.

There are now 1.776 million people in total receiving benefits, which is a decline of nearly 82,000 from the previous week and even more importantly a stark contrast to the 18.5 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 as employers are holding on to their workers and firing less.

Annual Inflation Hits 40-Year High

The Fed’s favorite measure of inflation, Personal Consumption Expenditures (PCE), showed that headline inflation rose 0.6% in February, which was in line with expectations. This caused the year over year reading to increase from 6% to 6.4%, which is the hottest level in 40 years!

Core PCE, which strips out volatile food and energy prices and is the Fed’s real focus, was just below estimates as it was up 0.4%. The year over year reading increased from 5.2% to 5.4%.

Private sector wages/salaries rose 0.9% in February. If we annualize the past six months, private sector wages are up almost 10.4% 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.

Strong Home Price Appreciation Continues

The Case-Shiller Home Price Index, which is considered the “gold standard” for appreciation, showed home prices rose 1.1% in January and 19.2% year over year. This annual reading is an acceleration from the 18.8% gain seen in the previous report.

The top three performing cities remained Phoenix (+33%), Tampa (+31%) and Miami (+28%). The bottom line is that appreciation remains at very high levels, even in the face of mortgage rates, which started to move higher in December.

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 1.6% in January and were up 18.2% year over year, which is an increase from the 17.6% rise reported for December.

Also of note, Zillow is predicting 18% home price appreciation from February 2022 to February 2023. This is supported by comments from Freddie Mac, who is saying there is a home shortage of four million homes. Note that builders have never built more than two million homes in a year, so the inventory shortage should persist for the foreseeable future.

In addition, Apartment List released its National Rent Report for March, which showed that rents rose 0.8%. Year over year rents were up a staggering 17.1%, though this is down from 17.6%. To put this in context, annual rent growth averaged just 2.3% in the pre-pandemic years from 2017-2019.

Over the first three months of 2022, rents were up almost 2%, which translates to about 7.5% year over year. While this is a slowdown from 2021, it is still a significant amount. Renewals are rising at around half the pace of new rents, up between 7-9%.

Watching an Important Recession Indicator

The yield spread between the 10-year Treasury and 2-year Treasury has been trending lower and actually inverted for a brief time last week. Why is this significant?

Normally, you would expect to receive a higher rate of return for putting your money away for 10 years versus 2 years. But when there is an economic slowdown and fear in the markets, the yield curve can go inverted – meaning that 2-year yields are higher than 10-year yields, which is backwards or upside down. Looking back at the history of recessions, we always see an inversion occur ahead of a recession, although it could take six months to two years for the actual recession to occur.

When the Fed hikes the Fed Funds Rate, this causes short-term yields to rise and can cause long-term yields to fall if it’s perceived that the rate hikes are getting inflation under control. Remember, the Fed hiked its benchmark Federal Funds Rate by 25 basis points at its March meeting. Note that the Fed Funds Rate is the interest rate for overnight borrowing for banks and it is not the same as mortgage rates.

Fed members are expecting seven additional hikes this year according to their dot plot chart. The spread between the 10-year and 2-year should continue to narrow and invert as the Fed hikes the Fed Funds Rate, and again this inversion has been a reliable recession indicator. And while a recession is not a great thing for the economy, one positive aspect is that periods of recession are always coupled with lower interest rates.

What to Look for This Week

After last week’s plethora of reports for the markets to digest, this week’s economic calendar is comparatively quiet. Perhaps the biggest news of the week will come on Wednesday when the minutes from the Fed’s March meeting will be released, as these always have the potential to move the markets.

 On Thursday, look for the latest Jobless Claims figures, as usual.

Technical Picture

Mortgage Bonds were able to get above the falling trend line in the early going last Thursday, but closed dead on it and then ended last week in the middle of a wide range between support at 101.342 and overhead resistance at 101.859. Bonds are at a moment of truth, testing the falling trend line. It will be important to see which way they break out this week. 

Mortgage Rates Continue to Move Up

Freddie Mac Primary Mortgage Market Survey as of March 24, 2022

This week, the 30-year fixed-rate mortgage increased by more than a quarter of a percent as mortgage rates across all loan types continued to move up. Rising inflation, escalating geopolitical uncertainty and the Federal Reserve’s actions are driving rates higher and weakening consumers’ purchasing power. In short, the rise in mortgage rates, combined with continued house price appreciation, is increasing monthly mortgage payments and quickly affecting homebuyers’ ability to keep up with the market.

Week of March 21, 2022 in Review

New and Pending Home Sales both declined in February, with low inventory a major reason why. Fed chatter also spooked Bonds.

New Home Sales fell 2% from January to February at a 772,000 unit annualized pace. This was lower than expectations and also follows a negatively revised sales figure for January. Looking at inventory, there were 407,000 homes for sale at the end of February, which equates to a 6.3 months’ supply. But that’s far from the whole story, as noted below.

Pending Home Sales, which measure signed contracts on existing homes, fell 4.1% in February, which was weaker than expected. Sales were also down 5.4% when compared to February of last year. While higher interest rates could certainly be impacting demand, the real story here is also inventory. There were only 870,000 existing homes for sale last month, which is down 16% from last year and 34% from July. Quite simply, if there were more homes for sale, there would be more sales.

The Fed also made headlines as Fed Chair Jerome Powell said that “inflation is much too high” and he pledged to take “necessary steps” to bring prices under control. He said that the Fed will continue to hike its benchmark Fed Funds Rate until inflation is under control. Note that the Fed Funds Rate is the interest rate for overnight borrowing for banks and it is not the same as mortgage rates.

Powell also noted that rate hikes could go from the traditional 25 basis point moves to more aggressive 50 basis point increases if necessary. The Fed’s more aggressive tone sparked some fears in the Bond market that the Fed will be more serious about reducing their balance sheet. Read on to see how Bonds reacted, and what we need to watch for in the months ahead.

There was good news from the labor sector, as Initial and Continuing Jobless Claims both declined in the latest week. The number of first-time filers fell to 187,000, which is the lowest level since September 1969. The number of people continuing to receive benefits fell to 1.35 million, a low going back to January 1970. There are now 1.858 million people in total receiving benefits, which is a stark contrast to the 19.9 million people receiving benefits in the comparable week last year.

Lastly, Wednesday’s 20-Year Bond Auction was met with strong demand. The bid to cover of 2.72 was stronger than the one-year average of 2.40. Direct and indirect bidders took 90.4% of the auction compared to 81% in the previous 12.

The Real Scoop on New Home Inventory

New Home Sales, which measure signed contracts on new homes, were down 2% from January to February at a 772,000 unit annualized pace. This was weaker than expectations of 801,000.

In addition, sales in January were revised lower and when factoring this in, February’s sales were actually down 3.5% from the originally reported January figure. Sales were also 6.2% lower than they were in February of last year.

The median home price came in at $400,600, which is a decrease of 6% from the previous report. The median home price is up 11% year over year, which points to an increase in higher-priced homes sold. The average-priced home came in at $511,000, which is up 26% from last year.

Looking at inventory, there were 407,000 homes for sale at the end of February, which equates to a 6.3 months’ supply and is up 33% from last year. But that’s not the whole story.

Of the 407,000 homes for sale, only 35,000 or 9% are actually completed. The rest are either not started or under construction. When we factor in the homes that buyers could actually move into today, inventory is closer to about half a month’s supply.

On a related note, US homebuilder KB Home reported first quarter earnings and Jeff Kaminski, their CFO noted, “Our biggest challenge today is completing homes, not selling them, as demand continues to be robust.”

They missed delivery figures because of ongoing supply constraints, and they cited flexible duct work, stainless steel, double ovens, garage doors, windows, cabinets, and HVAC equipment as just a few of the reasons they cannot deliver homes. The big takeaway once again is that demand remains robust, even in the face of higher rates.

Pending Home Sales Lower Than Expectations

Pending Home Sales, which measure signed contracts on existing homes, fell 4.1% in February, which was weaker than expected. Sales were also down 5.4% when compared to February of last year.

While higher interest rates could certainly be impacting demand, the real story here once again is inventory. There were only 870,000 existing homes for sale last month, which is down 16% from last year and 34% from July. Quite simply, if there were more homes for sale, there would be more sales.

Note that if we look at the number of signed contracts over a longer timeframe, such as the last five years, the level of Pending Home Sales is not really terrible. But they are below the crazy highs that were set during the rush to purchase that followed the dip in signed contracts during the start of COVID.

Fed Chatter Spooks Bonds

Last week, Fed Chair Jerome Powell said that “inflation is much too high” and he pledged to take “necessary steps” to bring prices under control. He said that the Fed will continue to hike its benchmark Fed Funds Rate until inflation is under control. Note that the Fed Funds Rate is the interest rate for overnight borrowing for banks and it is not the same as mortgage rates.

Powell also noted that rate hikes could go from the traditional 25 basis point moves to more aggressive 50 basis point increases if necessary. The Fed’s more aggressive tone sparked some fears in the Bond market that the Fed will be more serious about reducing their balance sheet, causing a selloff last Monday.

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. 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 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, as these actions will play a critical role in the direction of Mortgage Bonds and mortgage rates this year.

In addition, Fed Governor Waller acknowledged that the rental component within the Consumer Price Index is understating how much rents are really going up. He believes there is going to be a catch up in 2022, with that component potentially doubling, which would add upward pressure to inflation. While it’s possible some other components of the index come down, the Bond markets did not like these comments.

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.

Initial Jobless Claims Fall to Near 53-Year Low

Initial Jobless Claims fell by 28,000 to 187,000 in the latest week, as the number of people filing for unemployment benefits for the first time hit the lowest level since September 1969.

Continuing Claims, which measure people who continue to receive benefits after their initial claim is filed, also fell by 67,000 to 1.35 million. This is a low going back to January 1970.

There are now 1.858 million people in total receiving benefits, which is a decline of nearly 111,000 from the previous week and even more importantly a stark contrast to the 19.9 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 as employers are holding on to their workers and firing less.

What to Look for This Week

This week’s busy economic calendar kicks off on Tuesday when home price appreciation figures for January will be released from the Case-Shiller Home Price Index and the Federal Housing Finance Agency (FHFA) House Price Index.

On Wednesday, we’ll get the final reading on GDP for the fourth quarter of last year. Thursday brings crucial inflation data for February via Personal Consumption Expenditures, which is the Fed’s favored measure, along with Personal Income and Spending.

Wednesday also brings important labor sector news when the ADP Employment Report will give us an update on private payrolls for March. Thursday brings the latest Initial Jobless Claims data. Then ending the week on Friday, the highly anticipated Bureau of Labor Statistics Jobs Report for March will be released, which includes Non-farm Payrolls and the Unemployment Rate.

And from the manufacturing sector, look for March’s figures from the Chicago PMI on Thursday and the ISM Index on Friday.

Technical Picture

Mortgage Bonds have broken convincingly beneath support at 99.766 and tested the next floor at 99, which has held for now. The 10-year ended last week trading at around 2.48%, breaking above the 2.44 resistance level. The next ceiling is about 10 basis points higher at 2.58%. 

Mortgage Rates Exceed Four Percent

Freddie Mac Primary Mortgage Market Survey as of March 17, 2022

The 30-year fixed-rate mortgage exceeded four percent for the first time since May of 2019. The Federal Reserve raising short-term rates and signaling further increases means mortgage rates should continue to rise over the course of the year. While home purchase demand has moderated, it remains competitive due to low existing inventory, suggesting high house price pressures will continue during the spring homebuying season.

• Current Mortgage Rates Data Since 1971 xls

Week of March 14, 2022 in Review

The Fed hiked rates, inflation remains red hot, and a key housing report showed hope may be ahead for home inventory.

As expected, the Fed took action to address soaring inflation at its meeting last week by hiking their benchmark Fed Funds Rate. Note that the Fed Funds Rate is the interest rate for overnight borrowing for banks and it is not the same as mortgage rates. Investors were closely listening to Fed Chair Jerome Powell’s press conference following the meeting, for clues regarding additional actions the Fed may take this year that could impact mortgage rates and a key recession indicator. Don’t miss the important explanations below.

Speaking of inflation, it remains red hot at the wholesale level. The Producer Price Index rose 0.8% in February while on a year over year basis, the index was unchanged at a record high 10% after January’s report was revised higher. Core PPI, which strips out volatile food and energy prices, rose 0.2% in February, while the year over year figure declined from an upwardly revised 8.5% to 8.4%, which is just off another record.  

In housing news, sales of existing homes declined in February to an annualized pace of 6.02 million units. Note that this likely measured activity in December and January, when rates were rising but not at the levels they are today. But the real story remains low inventory. There were only 870,000 homes for sale at the end of February, which is just above the record low of 860,000 homes in January.

Meanwhile, rental prices rose 12.6% on an annual basis in January, per CoreLogic’s Single-family Rent Report. This marked the tenth consecutive month of record high growth. 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, which looks primarily at new rents.

Housing Starts, which measure the start of construction on homes, increased 6.8% in February to an annualized rate of 1.77 million. This was almost double expectations and the highest level in 16 years! Starts for single-family homes, which are the most important because they are in such high demand among buyers, also increased by 5.7% and they were up almost 14% year over year. With low inventory a pervasive problem around the country, this is a welcome sign and should help improve future inventory levels.

Builder confidence declined 2 points to 79 in March, per the National Association of Home Builders Housing Market Index. Looking at the components of the index, the real decline came in future sales expectations, which fell 10 points and is likely due to ongoing supply chain issues, labor costs, geopolitical uncertainty and higher rates. It should be noted, however, that a reading above 50 on this index, which runs from 0 to 100, still signals expansion.

Also of note, Initial and Continuing Jobless Claims both declined in the latest week. There are now 1.968 million people in total receiving benefits, which is a stark contrast to the 18.9 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.

Lastly, Retail Sales rose 0.3% in February, which was just beneath expectations. However, there was a big revision to sales in January of just over 1% to the upside. When factoring that in, Retail Sales still remain strong. This data begs the question of when inflation may cause more of a reduction in spending, especially given that we may be heading into recession-like conditions.

Understanding the Fed Rate Hike

The Fed met last week and, as expected, hiked the Federal Funds Rate by 25 basis points. Note that the Fed Funds Rate is the interest rate for overnight borrowing for banks and it is not the same as mortgage rates.

Looking at their dot plot chart, the majority of Fed members are expecting seven additional hikes this year. There are six remaining Fed meetings this year, which implies that there would have to be a double or 50 basis point hike at one of the upcoming meetings.

In addition, the Fed increased their 2022 inflation expectations by 65% from 2.6% to 4.3%. They also revised GDP lower from 4% to 2.8%.

The big negative for Mortgage Bonds was the Fed’s comments on their $9 trillion balance sheet. The Fed said that they would start to reduce their balance sheet at “a coming meeting” and in the Q&A session, Fed Chair Jerome Powell said they may finalize their plan at their next meeting in May.

 So, what does all of this potentially mean for mortgage rates?

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. 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 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.

 Watching an Important Recession Indicator

The yield spread between the 10-year Treasury and 2-year Treasury has been trending lower and when this goes inverted, it’s been a reliable recession indicator.

Normally, you would expect to receive a higher rate of return for putting your money away for 10 years versus 2 years. But when there is an economic slowdown and fear in the markets, the yield curve can go inverted – meaning that 2-year yields are higher than 10-year yields, which is backwards or upside down. Looking back at the history of recessions, we always see an inversion occur ahead of a recession, although it could take six months to two years for the actual recession to occur.

While we are not seeing the 10-year / 2-year spread go inverted yet, it has narrowed a great deal. And when the Fed hikes the Fed Funds Rate, this causes short-term yields to rise and can cause long-term yields to fall if it’s perceived that the rate hikes are getting inflation under control.

We are not seeing long-term yields fall yet, but short-term yields are climbing. And while there is not an inversion between the 10-year and 2-year, there are other inversions happening on the yield curve.

Recently, we’ve seen the 7-year yield move higher than the 10-year, the 5-year yield at about the same level as the 10-year, the 3-year yield 3 basis points beneath the 10 year, and the 20-year yield above the 30-year yield.

This is another important factor to closely watch in the months ahead.

Record High Wholesale Inflation

The Producer Price Index (PPI), which measures inflation on the wholesale level, rose 0.8% in February, which was just beneath estimates of 0.9%. On a year over year basis, PPI was unchanged at 10% after January’s report was revised higher. The index is at a record high since the methodology for collecting data was changed in 2010.

Core PPI, which strips out volatile food and energy prices, rose 0.2% in February, which was cooler than the 0.6% rise expected. The year over year figure declined from an upwardly revised 8.5% to 8.4%, which is just off another record.

Producer inflation remains elevated, which often leads to hotter consumer inflation levels, as producers pass those higher costs along to consumers. And keep in mind that this report was for February, before both the war in Ukraine and China’s shut down of the Shenzhen region due to a COVID outbreak. This area of China is known as its “Silicon Valley,” and the shutdown will likely cause more pressure on producer prices.

 Existing Home Sales Drop in February

Existing Home Sales, which measure closings on existing homes, showed that sales were down 7.2% in February to an annualized pace of 6.02 million units. Note that this likely measured activity in December and January, when rates were rising but not at the levels they are today. While this data was a bit worse than expectations, it does follow a similar rise in the previous month. On a year over year basis, sales were only down 2.4%, which is quite miraculous considering higher rates, higher home prices and no inventory.

And speaking of inventory, there were only 870,000 homes for sale at the end of February. This is up a little over 2% from the record low in January but is still down 15.5% annually and at very depressed levels. From July, inventory is down about 33%.

There was only a 1.7 months’ supply of homes available for sale at the end of February. 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 18 days in February, down from 19 in January. This should continue to be supportive of home prices.

The median home price was reported at $357,300, which is up 15% 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 29% of sales, which is up slightly from 27% in January. Cash buyers declined from 27% to 25%, while investors purchased 19% of homes, down from 22%. Foreclosures and short sales accounted for less than 1% of all transactions.

Rents on the Rise

CoreLogic’s Single-family Rent Report showed that rent prices hit a tenth consecutive month of record high growth in January. Year over year, rents increased 12.6%, up from the 12% annual growth reported in December. By comparison, rents were up just 3.9% annually in January 2021.

Miami led the way with rental prices up 38.6%, followed by Orlando at 19.9%. Washington, D.C. had the lowest increase at 5.6%.

Note that this report measures both new and renewal rents for both single-family homes and condos, putting it lower than recent data from Apartment List. Their rent report, which looks primarily at new rents, showed nearly 18% annual growth in February. To put this in context, annual rent growth averaged just 2.3% in the pre-pandemic years from 2017-2019.

Housing Starts Nearly Double Expectations

Housing Starts, which measure the start of construction on homes, increased 6.8% in February to an annualized rate of 1.77 million. This was almost double expectations and the highest level in 16 years! Year over year, Housing Starts were up 22%.

Starts for single-family homes, which are the most important because they are in such high demand among buyers also increased by 5.7% and they were up almost 14% year over year.

Building Permits, which are a good forward-looking indicator for Housing Starts, fell by 1.9% last month, but they were up 7.7% on a year over year basis. Single-family Permits also fell 0.5%, but they were up 5.4% year over year.

The bottom line is that low inventory has been a big issue around the country, so the increase in Housing Starts is a welcome sign and should help future inventory levels.

 Builder Confidence Declines for Fourth Straight Month

The National Association of Home Builders Housing Market Index, which is a real-time read on builder confidence, fell 2 points to 79 in March from a downwardly revised reading of 81 in February.

Looking at the components of the index, current sales conditions fell 3 points to 86, which is still very strong. Buyer traffic increased 2 points to 67, which is also showing strength. The real decline came in future sales expectations, which fell 10 points. This is likely due to ongoing supply chain issues, labor costs, geopolitical uncertainty and higher rates.

It should be noted, however, that a reading above 50 on this index, which runs from 0 to 100, still signals expansion.

While NAHB’s Index showed a decline in builder confidence, Lennar, who is the largest homebuilder in the U.S., reported that they are still seeing very strong demand on all their sites and expect sales to increase this year.

Initial and Continuing Jobless Claims Decline

The number of people filing for unemployment benefits for the first time declined by 15,000 in the latest week, as Initial Jobless Claims were reported at 214,000.

Continuing Claims, which measure people who continue to receive benefits after their initial claim is filed, also fell by 71,000 to 1.419 million.

There are now 1.968 million people in total receiving benefits, and while this is almost 60,000 more than the prior week, more importantly it is a stark contrast to the 18.9 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

After last week’s full economic calendar, this week’s release schedule is quieter but features several key reports to note.

More housing news is ahead when New Home Sales for February are reported on Wednesday. February’s Pending Home Sales follow on Friday.

The latest Jobless Claims data will be reported on Thursday, as usual, along with February’s Durable Goods Orders. Investors will also be closely watching Wednesday’s 20-year Bond auction for the level of demand.

Technical Picture

Mortgage Bonds ended last week higher than they were when the Fed hiked after testing support at 100.446 and bouncing higher in the latter half of the week. This is a bottoming out structure, coupled with a positive stochastic crossover. Bonds have been oversold for a long time and appear to be due for a rebound. The 10-year is in a similar position, now back under 2.16%.

Mortgage Rates Rise

Freddie Mac Primary Mortgage Market Survey as of March 10, 2022

Following two weeks of declines, mortgage rates rose this week as U.S. Treasury yields increased. Over the long-term, we expect rates to continue to rise as inflation broadens and shortages increasingly impact many segments of the economy. However, uncertainty about the war in Ukraine is driving rate volatility that likely will continue in the short-term. The Fed meets this week and while we are all but guaranteed a rate increase of 25 basis points, questions still remain on how many more rate hikes will we see in 2022. There are also questions about what the Fed will do with its balance sheet. In addition to the rate hike, will they consider reducing the amount of mortgage backed securities it holds? These are the primary levers of monetary policy. A quick note on the increase–there is not a one-to-one relationship between the Fed moves and mortgage rates. They are correlational but not causal. But rates are on the way up mostly because the mortgage backed security, which as you will read below, hates inflation. Now is the time to encourage your buyers to get going on offers. As a reminder if you have buyers that were approved at their maximum loan amount in the last two months, you may want to revisit that approval because rates are about percentage point higher since the beginning of the year.

• Current Mortgage Rates Data Since 1971 xls

Week of March 7, 2022 in Review

Consumer inflation is at the hottest level since 1982 while commodity prices are also on the rise.

The Consumer Price Index (CPI) showed that consumer inflation rose by 0.8% in February while the year over year reading rose from 7.5% to 7.9% – the hottest level since 1982 when it was at 8.4%! Core CPI, which strips out volatile food and energy prices, rose by 0.5%. On an annual basis, Core CPI jumped from 6% to 6.4%.

Small business owners reported that inflation is the biggest problem right now, per the National Federation of Independent Business Small Business Optimism Index. Within the report, companies that expect higher selling prices rose 7 points to 68%, which is a fresh record high going back to 1974. Note that this report was for February, and this figure could rise even more.

Besides seeing small businesses report higher selling prices, the price of gas and other commodities like nickel, gold and copper are also rising – all of which can contribute to inflation. Rising inflation is important to monitor because it can have a big impact on Mortgage Bonds and home loan rates, which are tied to them. The Fed is expected to take action to address rising inflation at its meeting this week, and it is crucial to monitor what they do – and how the markets react.

In addition, it’s important to note that the yield spread between the 10-year Treasury and 2-year Treasury has been trending lower. If this goes inverted, meaning longer-term maturities yield less than shorter-term maturities, it has been a very reliable recession indicator.

So, what does all of this potentially mean for the housing market? Don’t miss our important explanations below.

Over in the labor sector, the number of people filing for unemployment benefits on both an initial and continuing basis moved higher in the latest week. However, claims are back at strong pre-pandemic levels. There are now 1.9 million people in total receiving benefits, which is a stark contrast to the 20.8 million people receiving benefits in the comparable week last year.

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. Find out the results below.

Consumer Inflation Remains at 40-Year High

The Consumer Price Index (CPI), which measures inflation on the consumer level, rose by 0.8% in February. This pushed the year over year reading higher from 7.5% to 7.9%, which is the hottest reading since 1982, when it was at 8.4%.

Core CPI, which strips out volatile food and energy prices, rose by 0.5%. As a result, year over year Core CPI increased from 6% to 6.4%. While these readings are red hot, they were in line with market estimates.

Within the report, rents rose 0.6% in February and increased from 3.8% to 4.2% 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 4.1% to 4.3%. 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 these amounts.

Why is rising inflation significant?

Besides causing higher prices, inflation is the arch enemy of fixed investments like Mortgage Bonds because it erodes the buying power of a Bond’s fixed rate of return. If inflation is rising, investors demand a rate of return to combat the faster pace of erosion due to inflation, causing interest rates to rise.

The Fed is expected to address inflation at its two-day meeting Tuesday and Wednesday of this week, with expectations of a 25 basis point hike to the Fed Funds Rate.

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 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.

Additional Impacts of Inflation

February’s National Federation of Independent Business Small Business Optimism Index showed that small businesses grew less optimistic last month, as the index declined from 97.1 to 95.7. This is the lowest reading since January 2021.

Small business owners reported that inflation is the biggest problem right now. As a result, companies that expect higher selling prices rose 7 points to 68%, which is a fresh record high going back to 1974. Note that this report was for February, so these figures may worsen.

In addition, commodity prices are surging. In Europe, which gets the majority of their natural gas from Russia, the price is up 256% in the last 2 weeks. Imagine your heating bill going up 5 times or from $200 per month to $1,000.

Additionally, 70% of the world’s neon gas comes from Ukraine. Neon gas is an important factor in the production of semiconductors, which are already in a massive shortage. This can have implications for cars and other products that use chips and is something we will need to monitor in the months to come.

Other commodities, including nickel, gold and copper, are also on the rise and at historic levels. Many of the commodities that have risen are components of finished goods, which will cause inflation to continue to rise and be widespread.

Recession Indicators to Note

Besides seeing small businesses report higher selling prices, we’re also seeing economic conditions slowing. The yield spread between the 10-year Treasury and 2-year Treasury has been trending lower.

What does this mean?

It is natural to expect a greater rate of return for obligating money for a longer period of time. Money that is committed to be lent for 10 years should normally offer a higher rate of return than money that would be committed for one or two years.

This increase in yield over time is known as the yield curve, which naturally moves up with maturity. But there is a phenomenon called an inverted yield curve, which has longer-term maturities yielding less than shorter-term maturities. This occurs when investors feel that prices in the future will decrease beneath present levels. When this goes inverted, it has been a very reliable recession indicator.

Again, the Fed is expected to hike their benchmark Fed Funds Rate at their meeting this week. This hike will push the short end of the yield curve higher, while the long end could move lower if it’s perceived that inflation is being reduced. This will cause an inversion at an even faster rate.

If we are to see a recession, how will it impact housing? 

If we look to the history of all the recessions since 1960, housing either remained stable or values increased in almost all of them. The exception is 2009, but that recession was caused by the housing bubble. That recession did not cause the housing bubble. Remember most recently that during the 2020 recession, home prices powered higher.

Why does housing usually perform well during these periods? Because interest rates typically decline sharply.

 Jobless Claims Tick Higher But Remain At Healthy Levels

Initial Jobless Claims rose by 11,000 in the latest week, as 227,000 people filed for unemployment benefits for the first time. In addition, the previous week’s total was revised higher by 1,000 people.

Continuing Claims, which measure people who continue to receive benefits after their initial claim is filed, rose by 25,000 to 1.494 million.

There are now 1.9 million people in total receiving benefits, which is 62,000 fewer than the prior week, and more importantly a stark contrast to the 20.8 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.

Important Auctions Bring Mixed Results

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 just below average demand. The yield of 1.92% was just a hair above the when issued pricing (lower is better). The bid to cover of 2.47 was just below the one-year average of 2.50. The percentage of direct and indirect bidders was about in line with the 6-month average. The auction did not have too much of an impact on the markets.

The 30-Year Bond auction was met with strong demand. The bid to cover of 2.46 was above the one-year average of 2.30. Direct and indirect bidders took 87.9% of the auction compared to 81.9% in the previous 12.

What to Look for This Week

A full week of economic reports are ahead covering a wide range of the economy.

On Tuesday, more inflation news will be reported when February’s Producer Price Index will give us a read on wholesale inflation for that month. We’ll also get an update on manufacturing for the New York region when March’s Empire State Index is reported.

Wednesday brings the latest on February Retail Sales and an update on how confident builders are feeling this month via the National Association of Home Builders Housing Market Index.

Perhaps the biggest news of the week will come Wednesday afternoon when the Fed’s two-day FOMC meeting concludes with its Monetary Policy Statement. Investors will be closely watching to see what action the Fed takes to address rising inflation.

More housing data will be reported on Thursday with February’s Housing Starts and Building Permits. There will also be additional regional manufacturing news via March’s Philadelphia Fed Index, and the latest Jobless Claims data will be reported, as usual.

Ending the week on Friday, look for Existing Home Sales data for February. 

Technical Picture

Mortgage Bonds have been in a clear downtrend, now trading just above an important floor of support at the 50% Fibonacci retracement level, which was tested throughout Friday’s trading session. So far, Bonds have bounced higher off this floor. Until this level is broken, there is reason to believe that prices can remain around current levels or rebound high.

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.

• Current Mortgage Rates Data Since 1971 xls

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, 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

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

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

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.

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, 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, 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

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

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

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!

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

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%.

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.

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

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

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

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