Mortgage Rates Continue to Slide Down but Remain Volatile

On Friday, mortgage rates dropped to their lowest point in six weeks as concerns arose over potential negative developments in the banking industry. When such fears surface, investors typically withdraw money from the stock market and invest in bonds, creating an excess demand for bonds that can lead to lower mortgage rates. Leading into the weekend, the average lender offered a 30-year fixed mortgage rate below 6.5% for well-qualified borrowers.

Because mortgage rates are influenced by the broader bond market any volatility in it can cause mortgage rates to swing, sometimes widely. Unfortunately, rates have now rebounded to above that level because of the “risk on” sentiment in the market–meaning that investors are purchasing stocks, rather than bonds. This “see-saw” between stocks and bonds is why rates are constantly changing.

Because there were no major developments in the banking industry over the weekend (welcome relief after the previous weekends with SVB-Signature-Silvergate and then First Republic). This allowed investors to shift their focus back to other sectors and with the news of the sale of Silicon Valley Bank’s deposits and loans, investors sought equity positions, taking money away from the bond markets.

On the homebuyer front, the news is more positive with improved purchase demand and stabilizing home prices. If mortgage rates continue to improve and stabilize over the next few weeks, look for a continued rebound during the first weeks of the spring homebuying season.

CalHFA Dream for All is here!

The Dream For All Shared Appreciation Loan is a down payment assistance program for first-time homebuyers to be used in conjunction with the Dream For All Conventional first mortgage for down payment and/or closing costs.

Upon sale or transfer of the home, the homebuyer repays the original down payment loan, plus a share of the appreciation in the value of the home.

You can learn more about the program and what options you have by contacting me today!

Freddie Mac Primary Mortgage Market Survey^® as of March 23, 2023

• Current Mortgage Rates Data Since 1971​xlsx

Week of March 20, 2023 in Review

The Fed hiked its benchmark Fed Funds Rate despite ongoing turbulence in the banking sector, while both new and existing home sales beat expectations last month. Don’t miss these stories and more:

• Fed Hikes Rates Another 25 Basis Points
• Existing Home Sales Strong Despite Media Reports
• Signed Contracts on New Homes Rise for Third Consecutive Month
• Jobless Claims Reflect Tight Labor Market
• Decline in Demand for Big-Ticket Items

Fed Hikes Rates Another 25 Basis Points

The Fed hiked its benchmark Fed Funds Rate by 25 basis points at its meeting last Wednesday, marking the ninth hike since last March and bringing it to a range of 4.75% to 5%. The Fed Funds Rate is the interest rate for overnight borrowing for banks and it is not the same as mortgage rates. When the Fed hikes the Fed Funds Rate, they are trying to slow the economy and curb inflation.

What’s the bottom line? In the press conference following the meeting, Fed Chair Jerome Powell was grilled regarding the recent turmoil in the regional banking sector. He stressed that the Fed “took powerful actions with Treasury and the FDIC, which demonstrate that all depositors’ savings are safe and that the banking system is safe.” Powell noted that “deposit flows in the banking system have stabilized over the last week” and he criticized Silicon Valley Bank’s management, saying that the bank “failed badly” and exposed their customers to “significant liquidity risk and interest rate risk.”

Powell also said the committee considered a pause in rate hikes following the banking crisis but ultimately decided with a “very strong consensus” to proceed with hiking. Powell noted the Fed felt it was critical to sustain the public’s confidence that they can restore price stability, and they wanted to take action in furtherance of this goal.

Powell acknowledged that inflation has moderated since the middle of last year, but he cautioned that “the process of getting inflation back down to 2 percent has a long way to go and is likely to be bumpy.”

Existing Home Sales Strong Despite Media Reports

Existing Home Sales rose 14.5% from January to February to a 4.58 million unit annualized pace, per the National Association of Realtors (NAR), coming in much stronger than estimates and ending twelve consecutive months of declines. Sales were 22.6% lower than they were in February of last year, though this is less than the nearly 37% annual decline seen in January.

This report measures closings on existing homes, which represent around 90% of the market, making it a critical gauge for taking the pulse of the housing sector.

What’s the bottom line? February’s data showed signs of strength in the housing market, despite media headlines to the contrary. For example, while there was a 0.2% decline in the median home price to $363,000 from a year earlier, this is not the same as a decline in home prices as some reports implied.

The median home price simply means half the homes sold were above that price and half were below it, and this figure can be skewed by the mix of sales among lower-priced and higher-priced homes. Real appreciation data per the latest Case-Shiller Home Price Index showed that home prices were 5.8% higher than a year earlier.

In addition, there were 980,000 homes available for sale at the end of February, up from 850,000 a year earlier. However, this inventory increase is from a record low level and overall, supply is still much lower than in a balanced market.

Homes stayed on the market on average for 34 days, while 57% of homes sold in February were on the market for less than a month, which also speaks to continued demand for homes. NAR’s Chief Economist Lawrence Yun noted that, “Inventory levels are still at historic lows. Consequently, multiple offers are returning on a good number of properties.”

Signed Contracts on New Homes Rise for Third Consecutive Month

New Home Sales, which measure signed contracts on new homes, rose 1.1% in February to a 640,000-unit annualized pace. This was much stronger than estimates of a 3% decline and marks the third straight month that sales moved higher. However, downside revisions were made to January’s sales figure and sales remain 19% lower than they were in February of last year. 

The median sales price rose from $426,500 in January to $438,200 in February. Again, this figure is not the same as appreciation but represents the mid-price and can be skewed by the mix of sales among lower-priced and higher-priced homes.

What’s the bottom line? There were 436,000 new homes for sale at the end of February, which equates to an 8.2 months’ supply at the current sales rate. However, only 72,000 were actually completed. The rest were either under construction or not even started, with the latter category spiking from January. This reflects a growing backlog among builders, as the number of completed homes equates to just 1.4 months’ supply, which is well below a balanced market.

Alicia Huey, Chair for the National Association of Home Builders, noted that builders report “strong pent-up demand” with many buyers “turning more to the new home market due to a shortage of existing inventory.”

Jobless Claims Reflect Tight Labor Market

Initial Jobless Claims were flat in the latest week, as the number of first-time filers declined by 1,000 to 191,000. The number of people continuing to receive unemployment benefits after their initial claim is filed rose 14,000 to 1.694 million, which is one of the highest readings over the last year.

What’s the bottom line? The relatively low number of Initial Jobless Claims suggests that the labor market remains tight and companies are trying to retain workers. However, the high number of Continuing Claims also suggests it’s harder for people who are let go to find new employment. While these filings can be volatile from week to week, the overall trend has been higher. Continuing Claims have now risen by nearly 350,000 since the low reached last September.

Decline in Demand for Big-Ticket Items

Durable Goods Orders fell 1% in February, coming in much worse than expectations, while January’s report was also revised to the downside. Durable goods are products that are meant to last more than three years, such as cars, appliances and computers. These bigger, non-frequent purchases are typically financed, which has become more expensive now given the Fed’s hikes to the Fed Funds Rate. This data shows that the Fed’s rate hikes designed to lessen demand, and thereby lower inflation, are working.

What to Look for This Week

More housing news is ahead, starting with Tuesday’s release of home price appreciation data for January from the Case-Shiller Home Price Index and the Federal Housing Finance Agency (FHFA) House Price Index. Pending Home Sales for February will be reported on Wednesday.

Look for the latest Jobless Claims data along with the final reading for fourth quarter 2022 GDP on Thursday. Friday brings February’s reading for the Fed’s favored inflation measure, Personal Consumption Expenditures.

Technical Picture

Mortgage Bonds are continuing to battle with their 200-day Moving Average after opening above it Friday morning. This is a critical level to watch, as a clear break higher means the next stop is at 101.67. The 10-year ended last week at around 3.37% though it did move as low as 3.29%.

Banks collapsing, Bailouts by Central Banks, are we heading into another 2008?

First Silicon Valley Bank, Signature Bank and Silvergate. Now First Republic Bank is stumbling and looking for a suitor after getting a considerable injection. Over the weekend UBS was forced to buyout Credit Suisse with $14B euros of guarantees from the Swiss National Bank. Are we heading into another 2008?

So far, we believe the Fed intends to raise the overnight rate this week by at least 25 basis points or a quarter of one percent to bring the overnight rate to between 4.75%-5% in an effort to manage inflation. That’s reduced from 50 basis points that they were suggesting, which follows the logic that credit tightening will add a deflationary component by removing money from the market and so the bigger move is no longer needed.

The larger question is the financial stability of the banking industry and whether we are in for something that looks and feels like 2008? When you have several key regional banks moved into receivership and the fire sale of Credit Suisse to UBS for about 30 cents on the euro, there’s plenty of room for questions. The UBS rescue over the weekend was well received by the markets and the primary beneficiary appears to be mortgage rates. This makes sense because in times of uncertainty, money seeks a safe haven (like mortgage backed securities and US treasuries), which lowers yields on these financial instruments and therefore interest rates for home mortgage tend to drop. This turbulence in the financial markets is putting significant downward pressure on rates, which should benefit borrowers in the short-term. In fact, rates are down about half a percent in rate in just about a week’s time. If you have clients that need an alternative source for a mortgage, please have them contact me at: 650-207-4364

If you want to learn more about what’s going on with the financial markets, banking and the liquidity crisis, here are a couple of good explainers:

• Explainer: Are we in a banking crisis?
• Bank runs, bailouts, rescues: are the ghosts of 2008 rising again?

Mortgage Rates Pull Back Slightly Last Week

Freddie Mac Primary Mortgage Market Survey^® as of March 16, 2023

• Current Mortgage Rates Data Since 1971​xlsx

Week of March 13, 2023 in Review

Turbulence in the banking sector led to market volatility while news on inflation and home builder confidence brought encouraging signs. Read on for these stories and more:

• Lag in Shelter Costs Impacting Consumer Inflation
• Wholesale Inflation Cooler Than Expected
• Will Cracks in the Banking System Impact Further Fed Rate Hikes?
• More “Starts” Needed for Single-family Homes
• Builder Confidence Rose for Third Consecutive Month
• Unemployment Claims Suggest Slower Pace of Hiring
• Weakness in Manufacturing and Retail Sales

Lag in Shelter Costs Impacting Consumer Inflation

Consumer inflation was generally in line with forecasts last month, per the latest Consumer Price Index (CPI). Overall, inflation rose 0.4% in February, with the annual reading declining from 6.4% to 6.0%. Core CPI, which strips out volatile food and energy prices, increased 0.5% while the year-over-year index decreased from 5.6% to 5.5%.

What’s the bottom line? The shelter index increased 8.1% over the last year, which accounted for over 60% of the total increase in all items less food and energy per the Bureau of Labor Statistics. However, shelter costs have been coming down in more real-time data. For example, Apartment List’s latest Rent Report showed that year-over-year rent growth decelerated to 3% in February, the lowest level since April 2021. Once these moderating shelter costs are reflected in the CPI data, they should add additional downside pressure to inflation. 

And while inflation remains elevated, it has declined one-third from the high of 9.1% seen last June. Since lower inflation typically helps both Mortgage Bonds and mortgage rates improve, these signs of easing inflation are welcome.

Wholesale Inflation Cooler Than Expected

The Producer Price Index (PPI), which measures inflation on the wholesale level, decreased by 0.1% in February, coming in cooler than the 0.3% gain expected. January’s reading was also revised lower. On a year-over-year basis, PPI decreased from a downwardly revised 5.7% to 4.6%. Core PPI, which strips out volatile food and energy prices, was flat last month and much lower than the expected 0.4% gain. On an annual basis, Core PPI declined from 5.4% to 4.4%. 

What’s the bottom line? Annual wholesale inflation readings are also moving lower in the right direction, and the progress made on the producer side of inflation is notable. At its peak last March, PPI was at 11.6% year over year and is now well less than half that amount at 4.6%. 

Will Cracks in the Banking System Impact Further Fed Rate Hikes?

The markets were especially volatile last week as turbulence in the banking sector was seen here in the U.S. as well as Europe. Part of the issue stems from central banks hiking rates so quickly in such a short period of time, which impacts banks’ interest margins and can lead to liquidity issues, especially if depositors drain their money from banks to take advantage of other higher-yielding options.

What’s the bottom line? This Wednesday brings a crucial decision from the Fed, as they will announce whether they will again hike their benchmark Fed Funds Rate. This is the interest rate for overnight borrowing for banks and it is not the same as mortgage rates. The Fed has hiked the Fed Funds Rate eight times since last March, bringing it to a range of 4.5% to 4.75%. 

When the Fed hikes the Fed Funds Rate, they are trying to slow the economy and curb inflation, which continues to ease per the latest CPI and PPI reports as noted above. Will the Fed pause additional hikes to avoid adding more pressure to the banking sector? Their actions and commentary will be crucial to watch in the week ahead. 

More “Starts” Needed for Single-family Homes

Home construction picked up in February as Housing Starts, which measure the start of construction on homes, rose 9.8% from January. Building Permits, which are indicative of future supply, also rose 13.8%. While these overall numbers were higher, most of the growth was in multi-family units. Starts for single-family homes were up just 1.1% for the month but they’re still almost 32% lower than they were in February of last year.  Permits for single-family homes were also nearly 36% lower than last February. 

What’s the bottom line? Single-family homes remain in high demand among buyers and the ongoing disparity between supply and demand should continue to be supportive of prices, especially when we see more hibernating buyers resume their home search. The dynamics in today’s market are very different from the housing bubble, where demand was waning but the supply of new homes was significantly increasing.

Builder Confidence Rose for Third Consecutive Month

The National Association of Home Builders (NAHB) Housing Market Index, which is a near real-time read on builder confidence, rose two points to 44 in March. Among the components of the index, current sales conditions rose two points to 49 while buyer traffic was up three points to 31, marking the strongest traffic reading since last September. Sales expectations for the next six months ticked a point lower to 47. 

What’s the bottom line? Overall, home builder confidence has now risen 13 points since the low of 31 in December. Even though the reading is below 50, which signals contraction territory, sentiment is clearly rebounding and moving in the right direction.Unemployment Claims Suggest Slower Pace of Hiring

Initial Jobless Claims fell by 20,000 in the latest week, with 192,000 people filing for unemployment benefits for the first time. The number of people continuing to receive benefits after their initial claim is filed declined by 29,000 to 1.684 million, which is just below the highest Continuing Claims reading in 14 months. 

What’s the bottom line? Initial Jobless Claims remain muted, reflecting a tight labor market where companies are doing their best to hold on to workers. And while Continuing Claims can be volatile from week to week, the overall trend has been higher, as they have now risen by more than 300,000 since the low reached last September. This suggests it’s also harder for people who are let go to find new employment. 

Weakness in Manufacturing and Retail Sales 

March brought more negative readings (which signal contraction) reported for manufacturing in the New York and Philadelphia regions. The Empire State Index contracted sharply to -24.6, which was much worse than estimates, while the Philadelphia Fed Index remained in contraction territory for the seventh straight month. These reports suggest that the manufacturing sector is already experiencing recession-like conditions.

Meanwhile, Retail Sales were also down 0.4% in February after warmer than expected weather in January boosted sales at the start of the year. A drop in car sales and spending at restaurants contributed to the overall decline last month.

What to Look for This Week 

The Fed’s crucial two-day meeting begins Tuesday, with the Monetary Policy Statement and press conference coming on Wednesday. Housing news will also be in the spotlight, with February’s Existing Home Sales and New Home Sales releasing on Tuesday and Thursday, respectively. The latest Jobless Claims will also be reported on Thursday as usual.

Technical Picture

Mortgage Bonds moved sharply higher Friday, breaking above both their 50-day Moving Average and the 100.758 Fibonacci ceiling. The 10-year moved down to around 3.44%, closing beneath their 200-day Moving Average. 

Silicon Valley Bank Collapses and Signature Bank Stumbles

The collapse of Silicon Valley Bank and Signature Bank by the FDIC and First Republic Bank share price plummeting by as much as 70% this morning has left many of us wondering if we are heading into another 2008. The difference this time is that the stress being placed on these financial institutions appears to be contained and does not stem from lax mortgage lending policies like we had in the run up to 2007-2008.

Importantly, these events don’t appear to be impacting rates negatively. In fact, interest rate pricing got a little better this morning. This is mostly due to the market speculation that the Fed will back off any further hikes due to the collapse of a couple of regional banks over the past couple of days., This has investors worried and subsequently rotating money to the bond market. That’s great news for mortgage rates. Here’s what one of the sites that I follow said this morning: “…financial markets are trading as if current events imply a sea change for economic momentum, inflation, and the Fed rate hike trajectory.  It’s pretty much that simple.”

The author went on to say: “What’s not so simple is determining whether or not that trading will prove to be justified by changes in consumer behavior.  Also complicated will be the task of reacting to economic data for the month of February when the sea change wasn’t even an idea until last week.”

I’m cautious that the optimistic view will stick but remember the market is still digesting the news and could flip in the other direction quickly if additional news changes this view.

• Announcements regarding SVB here: https://www.fdic.gov/news/press-releases/2023/pr23016.html
• Announcements regarding SBNY here:  https://www.federalreserve.gov/newsevents/pressreleases/monetary20230312b.htm
• Overall market announcements here: https://www.cnbc.com/2023/03/12/stock-market-futures-open-to-close-news.html

Freddie Mac Primary Mortgage Market Survey^® as of March 9, 2023

Mortgage rates continued their upward trajectory into last week while the Federal Reserve signaled a more aggressive stance on monetary policy. The Fed may have move towards a softening of that stance given current conditions. Overall, consumers are spending in sectors that are not interest rate sensitive, such as travel and dining out. However, rate-sensitive sectors, such as housing, continue to be adversely affected. As a result, would-be homebuyers continue to face the compounding challenges of affordability and low inventory but it is still a great time to buy! In fact, this morning we are seeing mortgage rates about 75Bps (3/4 of point) lower since last Monday.

• Current Mortgage Rates Data Since 1971​xlsx

Week of March 6, 2023 in Review

A deeper look at labor sector data shows the job market may be weaker than the headlines suggest. Plus, the latest forecast on home price appreciation and the Fed’s vow regarding inflation:

• Jobs Data Shows Cracks in the Labor Sector
• Leisure and Hospitality Led the Way in Job Gains
• Continuing Jobless Claims Match 14-Month High
• Home Prices Still Forecasted to Appreciate This Year
• Fed Vows to “Stay the Course” in Inflation Fight

Jobs Data Shows Cracks in the Labor Sector

The Bureau of Labor Statistics (BLS) reported that there were 311,000 jobs created in February. While this was stronger than estimates, revisions to the data from December and January subtracted 34,000 jobs in those months combined. The unemployment rate rose from 3.4% to 3.6%.

What’s the bottom line? While the headline job growth number appeared strong, there were some cracks in the data.

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 and estimations. The Household Survey, where the Unemployment Rate comes from, is derived by calling households to see if they are employed.

The Household Survey has its own job creation component and it showed that there were only 177,000 new jobs created last month. The Household Survey also showed that the labor force increased by 419,000, which reflects more people entering the labor force and looking for employment. The number of people who have been unemployed for less than five weeks also jumped by 343,000, showing that people are having a harder time finding a job quickly after losing one. 

Leisure and Hospitality Led the Way in Job Gains

Private payrolls were stronger than expected last month with 242,000 jobs created per ADP’s Employment Report, although seasonal adjustments did add to the strength of this reading. While wage growth remains elevated, it slowed for both job-stayers and job-changers. ADP noted that “a particular area of weakness is with small establishments, which shed jobs every month since August 2022.”

What’s the bottom line? The leisure and hospitality sector once again led the way with 83,000 job gains. But these gains may soon be coming to an end. During the height of the pandemic, roughly 10 million leisure and hospitality jobs were lost. With the recovery well underway, we have seen significant job growth in this sector and we’re now approaching pre-pandemic levels. This means leisure and hospitality job gains may not bolster the overall total for much longer. 

Continuing Jobless Claims Match 14-Month High

Unemployment Claims rose in the latest week, as the number of first-time filers jumped by 21,000 to 211,000, which is the first time this metric topped 200,000 since early January. The number of people continuing to receive benefits after their initial claim is filed rose as well, surging 69,000 to 1.718 million and matching the highest reading in 14 months.

What’s the bottom line? Continuing Claims data clearly suggests it’s harder for people who are let go to find new employment. While this number can be volatile from week to week, the overall trend has been higher, as Continuing Claims have risen by 372,000 since the low reached last September.

This correlates with the Job Cuts Report from Challenger, Gray & Christmas showing that there were 78,000 job cuts last month, which is the highest February total since 2009. The report also noted that “so far this year, employers announced plans to cut 180,713 jobs … the highest January-February total since 2009.” While the bulk of cuts were in the technology sector, job cuts occurred in all industries Challenger tracks for the first time in a decade.

Home Prices Still Forecasted to Appreciate This Year

CoreLogic’s Home Price Index showed that home prices nationwide fell by 0.2% from December to January but they were 5.5% higher when compared to January of last year. This annual appreciation reading declined from 6.9% in December but is still solid. CoreLogic forecasts that home prices will drop 0.1% in February but rise 3.1% in the year going forward. 

What’s the bottom line? CoreLogic’s Chief Economist Selma Hepp said that “the continued shortage of for-sale homes is likely to keep price declines modest, which are projected to top out at 3% peak to trough.” This is a far cry from a housing crash of 20% that some in the media have been predicting.

And while CoreLogic has reported slightly negative readings month to month, they still forecast 3.1% appreciation nationwide over the next year, which can be meaningful for wealth creation. For example, if someone bought a $400,000 home and put 10% down, they would gain $12,000 in appreciation over the next year and earn a 30% return on their investment due to leverage.

Fed Vows to “Stay the Course” in Inflation Fight

Fed Chair Jerome Powell presented the Fed’s Semiannual Monetary Policy Report to Congress. He said that although inflation has moderated in recent months, there is still a long way to go until inflation reaches the Fed’s 2% target – and the road “is likely to be bumpy.” Powell noted stronger than expected employment, consumer spending and manufacturing data suggested that inflationary pressures were running higher than expected. He vowed the Fed will “stay the course until the job is done.”

What’s the bottom line? The Fed has hiked its benchmark Fed Funds Rate eight times since last March, bringing it to a range of 4.5% to 4.75%. This is the interest rate for overnight borrowing for banks and it is not the same as mortgage rates. When the Fed hikes the Fed Funds Rate, they are trying to slow the economy and curb inflation.

The Fed is clearly afraid of inflation resurging like it did in the 1970’s, as Powell noted that “the historical record cautions strongly against prematurely loosening policy.” The Fed’s next meeting and decision regarding additional hikes to the Fed Funds Rate is March 21-22.

What to Look for This Week

Consumer inflation will be in the spotlight when February’s Consumer Price Index is reported on Tuesday. Look for the Producer Price Index on Wednesday, which will give us news on wholesale inflation.

In housing news, we’ll receive an update on builder confidence this month from the NAHB on Wednesday while Housing Starts and Building Permits for February will be reported on Thursday.

Also of note, March’s manufacturing data for the New York and Philadelphia regions will be released on Wednesday and Thursday, respectively. February’s Retail Sales data will be delivered on Wednesday and the latest Jobless Claims will be reported as usual on Thursday.

Technical Picture

Mortgage Bonds made a sharp move higher Friday, temporarily breaking above several resistance barriers but were ultimately rejected lower from the 100-day Moving Average. The 10-year moved back down to around 3.70% on Friday, erasing the gains it had made since the last Consumer Price Index report was released on February 14. The 10-year is now testing its 50-day Moving Average and if this level is broken, the next floor is 3.64%.

Mortgage Rates Continue to Climb Up

Freddie Mac Primary Mortgage Market Survey^® as of March 2, 2023

As we started the year, the 30-year fixed-rate mortgage decreased with expectations of lower economic growth, inflation and a loosening of monetary policy. However, given sustained economic growth and continued inflation, mortgage rates boomeranged and were inching up toward seven percent late last week and have now gone above that for some borrowers. Lower mortgage rates back in January brought buyers back into the market. Now that rates are moving up, affordability is once again hindered — making it difficult for potential buyers to act, particularly for repeat buyers with existing mortgages at less than half of current rates.

• Current Mortgage Rates Data Since 1971​xlsx

Week of March 6, 2023 in Review

Contract signings for existing homes surged in January while the latest appreciation data for December addressed concerns about a housing bubble. Read on for these important stories, plus news on unemployment claims and manufacturing:

• Pending Home Sales Rose for Second Straight Month
• Reports of a Housing Crash Not Supported by Appreciation Data
• What’s Really Going on With Jobs?
• Contraction in Manufacturing Continues

Pending Home Sales Rose for Second Straight Month

Pending Home Sales rose 8.1% from December to January, which was much stronger than expectations and follows the 1.1% gain in December. Sales were down 24.1% from a year earlier, though this was an improvement from the 33.9% annual decline in December’s report. Pending Home Sales is a critical report for taking the pulse of the housing market. It is considered a forward-looking indicator of homes sales because it measures signed contracts on existing homes, which represent around 90% of the market.

What’s the bottom line? While January is not known to be a strong housing month, this year it brought a considerable increase in activity as rates moved lower. Lawrence Yun, chief economist for the National Association of Realtors, confirmed, “Buyers responded to better affordability from falling mortgage rates in December and January.”

Rates did rise following the Jobs Report for January that was released on February 3, which was stronger than expected due in large part to seasonal adjustments made to the data. If upcoming economic data shows cooling inflation or weakness in the economy, the recent move higher in rates could reverse course. Expect another rebound in housing activity if this occurs.

Reports of a Housing Crash Not Supported by Appreciation Data

The Case-Shiller Home Price Index, which is considered the “gold standard” for appreciation, showed home prices fell 0.8% from November to December but they were 5.8% higher when compared to December 2021. This annual reading is a decline from the 7.6% gain reported in November.

The Federal Housing Finance Agency (FHFA) also released their House Price Index, which revealed that home prices fell 0.1% from November to December. While prices rose 6.6% from December 2021 to December 2022, this was a decline from the 8.2% annual increase reported in November. FHFA’s report measures home price appreciation on single-family homes with conforming loan amounts, which means it most likely represents lower-priced homes. It also differs from Case-Shiller’s data, in that it does not include cash buyers or jumbo loans.

What’s the bottom line? Home prices have been softening nationwide, but S&P DJI Managing Director Craig J. Lazzara noted that they are only down 4.4% from their peak last June. This is a far cry from a housing crash of 20% that some in the media are predicting. 

Plus, when important seasonal adjustments were made to Case-Shiller’s data, prices were only down 2.7% from the peak. These adjustments remove some of the market strength seen during the busier home shopping seasons and some of the weakness seen during the softer months, so we can see the true trend over time. 

In addition, Case-Shiller’s 10-City and 20-City Indexes showed that prices in some major cities that were overheated are declining a bit more than they are in the nation overall. When removing those cities, prices around the rest of the country are flatter from the peak.

What’s Really Going on With Jobs?

Initial Jobless Claims declined by 2,000 in the latest week, as 190,000 people filed for unemployment benefits for the first time. Continuing Claims, which measure people who continue to receive benefits after their initial claim is filed, fell 5,000 to 1.655 million.

What’s the bottom line? Employers are clearly trying to keep the workers they currently have, as evidenced by the relatively low amount of Initial Jobless Claims we have been seeing each week. However, Continuing Claims data suggests it’s also harder for people who are let go to find new employment. While this number can be volatile from week to week, the overall trend has been higher, as Continuing Claims have risen by more than 300,000 since the low reached last September. This aligns with the decline in job postings that have been reported by sites like Indeed and ZipRecruiter.

Contraction in Manufacturing Continues

Economic activity in the manufacturing sector remained below 50 in contraction territory for the fourth straight month, as the ISM Index was reported at 47.7 for February. This data is compiled from a survey of purchasing and supply executives nationwide and measures the health of the manufacturing sector in the U.S. February’s reading was below expectations and follows important regional manufacturing indices, including those for the New York and Philadelphia regions, that also reported negative numbers last month.

What to Look for This Week

Labor sector data will dominate this week’s headlines, starting Wednesday with ADP’s Employment Report, which will give us an update on private payrolls for February. The latest Jobless Claims data will be reported on Thursday while Friday brings the Bureau of Labor Statistics Jobs Report for February, which includes Non-farm Payrolls and the Unemployment Rate.

Also of note, Fed Chair Jerome Powell will be presenting the Fed’s Semiannual Monetary Policy Report to Congress next Tuesday and Wednesday. 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 ended last week battling a ceiling at 99.547 and have formed a “morning star” pattern, which is a reliable indicator of a rebound. The 10-year moved sharply lower on Friday, breaking beneath the psychological 4% barrier. 

Mortgage Rates Trend Up

Freddie Mac Primary Mortgage Market Survey^® as of February 23, 2023

The economy continues to show strength, and interest rates are repricing to account for the stronger than expected growth, tight labor market and the threat of sticky inflation. Our research shows that rate dispersion increases as mortgage rates trend up. This means homebuyers can potentially save $600 to $1,200 annually by taking the time to shop among lenders to find a better rate. While rate is always an important factor in choosing a particular loan program, it is also important to choose a lender that is going to provide solid service. As a colleague once told me, “The sweetness of a low price is far outlasted by the bitterness of poor quality.” Also keep in mind that few buyers ever hold a mortgage for 30 years, with many finding a reason to restructure a loan every 5-7 years. While you should never take an unnecessarily high rate making a balanced decision in choosing the right lender and loan program is always prudent. A final thought, while mortgage rates are projected to stabilize below 6% in the second half of the year, timing the market is nearly impossible.

Week of February 20, 2023 in Review

Sales of new homes and consumer inflation were both hotter than expected in January. Plus find out what the latest data on Existing Home Sales says about inventory and the demand for homes.

• Consumer Inflation Higher Than Expected
• More to Existing Home Sales Data Than Meets the Eye
• New Home Sales Jumped Higher in January
• What Jobless Claims Data Suggests for Workers and Job Seekers
• Recession Signal Flashing

Consumer Inflation Higher Than Expected

The Fed’s favorite measure of inflation, Personal Consumption Expenditures (PCE), showed that headline inflation increased 0.6% in January, while the year-over-year reading rose from an upwardly revised 5.3% to 5.4%. Core PCE, which strips out volatile food and energy prices, rose by 0.6% with the year-over-year change increasing from an upwardly revised 4.6% to 4.7%.

What’s the bottom line? Inflation is the arch enemy of fixed investments like Mortgage Bonds because it erodes the buying power of a Bond’s fixed rate of return. If inflation is rising, investors demand a rate of return to combat the faster pace of erosion due to inflation, causing interest rates to rise. While inflation had been trending lower, this report was a disappointment as both year-over-year readings were above estimates and moved higher in the wrong direction. Hopefully, February’s report will be friendlier when it is released in March.

More to Existing Home Sales Data Than Meets the Eye

Existing Home Sales fell 0.7% from December to January to a 4 million unit annualized pace, per the National Association of Realtors (NAR), coming in a bit below expectations and marking the twelfth consecutive month of declines. Sales were also 36.9% lower than they were in January of last year. This is a critical report for taking the pulse of the housing market, as it measures closings on existing homes, which represent around 90% of the market.

What’s the bottom line? While it’s true that buyer activity was slower, multiple data points suggest that demand remains strong. Homes stayed on the market on average for 33 days, up from 26 days in December, but they are still moving fast. Plus, 54% of homes sold in January were on the market for less than 30 days.

In addition, unsold inventory increased slightly from December to 980,000 homes available at the end of January, but it remains below normal with just a 2.9 months’ supply available at the current sales pace. 

However, inventory is even tighter than that figure implies. Of the 980,000 homes counted as unsold inventory, only 626,000 were “active listings” while 354,000 homes (or 36% of the total) were under contract and not truly available for purchase. This data also speaks to ongoing demand for homes, as a normal market has 25% of inventory under contract. 

New Home Sales Jumped Higher in January

New Home Sales, which measure signed contracts on new homes, rose 7.2% in January to a 670,000-unit annualized pace. This was much stronger than estimates and marks the second straight month that sales moved higher. However, sales were 19.4% lower than they were in January of last year. Alicia Huey, chair for the National Association of Home Builders, noted the latest Housing Market Index showed that “57% of builders are using incentives to bolster sales.”

What’s the bottom line? Inventory is tight in the new home market as well. There were 439,000 new homes for sale at the end of January, which equates to a 7.9 months’ supply at the current sales rate. However, only 68,000 were completed, with the rest either not started or under construction. The number of completed homes equates to a 1.2 months’ supply, well below a balanced market.

In addition, while the median sales price fell from $465,600 in December to $427,500 in January, this is not the same as a decline in home prices. The median price simply means half the homes sold were above that price and half were below it, and this figure can be skewed by the mix of sales among lower-priced and higher-priced homes.

What Jobless Claims Data Suggests for Workers and Job Seekers

The number of people filing for unemployment benefits for the first time declined by 3,000 in the latest week, as 192,000 Initial Jobless Claims were reported. Continuing Claims, which measure people who continue to receive benefits after their initial claim is filed, fell 37,000 to 1.654 million.

What’s the bottom line? Initial Jobless Claims remain muted, reflecting a tight labor market where companies are doing their best to hold on to workers. And while Continuing Claims can be volatile from week to week, the overall trend has been higher, as they have now risen by more than 300,000 since the low reached last September.

This data suggests it’s harder for people who are let go to find new employment, which aligns with recent comments from ZipRecruiter noting that, “With an increasingly uncertain macroeconomic backdrop, employers have moderated their hiring plans and reduced their recruitment budgets in the first weeks of the year. Online job postings in our marketplace remained in line with the low point of the 2022 holiday season, rather than following the longstanding seasonal pattern of beginning a run-up in January.”

Recession Signal Flashing

The Conference Board released their Leading Economic Index (LEI) for January showing that it fell 0.3%, following a 0.8% decline in December. This report is a composite of economic indexes and can signal peaks and troughs in the business cycle.

What’s the bottom line? The LEI 6-month growth rate on an annualized basis was -7.4%. The Conference Board explained that when this number breaks beneath 0%, it is a warning signal, while a break beneath -4% is a recession signal that has been highly accurate historically. The Conference Board also stated that they believe the U.S. will enter a recession this year. 

What to Look for This Week

News on home sales and appreciation highlight an otherwise quiet economic calendar. On Monday look for Pending Home Sales for January while Tuesday brings home price appreciation data for December from the Case-Shiller Home Price Index and the Federal Housing Finance Agency (FHFA) House Price Index.

Also of note, we’ll get a read on the manufacturing sector when the ISM Index for February is reported on Wednesday. The latest Jobless Claims will be released Thursday as usual.

Technical Picture

Mortgage Bonds broke beneath support at the 99.711 level last Friday following the hotter than expected PCE report. The next support level is all the way down at 98.716. The 10-year ended last week trading at around 3.95%, which appears to have been an interim ceiling of resistance over the last few trading sessions. 

Mortgage Rates Increase for the Second Consecutive Week

Freddie Mac Primary Mortgage Market Survey^® as of February 16, 2023

Mortgage rates moved up for the second consecutive week. The economy is showing signs of resilience, mainly due to consumer spending, and rates are increasing. Overall housing costs are also increasing and therefore impacting inflation, which continues to persist. Existing home sales across the US were down 0.7% last month, along with the median home price ($359,000), which was down 2.2%. Active listings came in at 626,000, which equates to a 1.9 month supply. Inventory is still tight. That is likely to continue as few of those holding mortgages with interest rates showing a 2 or a 3 on the front of it will be incented to move. Which makes it a great time to be a first time homebuyer, as there is likely a bit less competition. You can find First Time Home Buyer content for your buyers here: First Time Buyer Information

• Current Mortgage Rates Data Since 1971​xlsx

Week of February 13, 2023 in Review

Home construction slowed in January but rising confidence among home builders this year is an encouraging sign. Also encouraging is the continued decline in the annual rate of inflation, although the drop was less than expected last month. Read on for these stories:

• Mild Progress on Consumer Inflation
• Wholesale Inflation Hotter Than Expected
• Household Formations Continue to Outpace Completions
• Builder Confidence Rose for Second Straight Month
• Continuing Jobless Claims Continue to Creep Higher
• Was the Rebound in Retail Sales an Anomaly?

Mild Progress on Consumer Inflation

The Consumer Price Index (CPI), which measures inflation on the consumer level, showed that inflation increased by 0.5% in January. On an annual basis, inflation declined from 6.5% to 6.4%. While the monthly reading was in line with estimates, the year-over-year figure was hotter than expectations. Core CPI, which strips out volatile food and energy prices, rose 0.4% while the year-over-year index decreased from 5.7% to a hotter than forecasted 5.6%.

In addition, shelter costs make up 43% of Core CPI and they rose 0.7% in January, meaning they played a big role in the overall 0.4% monthly gain in Core CPI. However, shelter costs have been lagging in the CPI report, as they have been coming down in more real-time data. Once these moderating shelter costs are reflected in the CPI data, they should add additional downside pressure to inflation. 

What’s the bottom line? Inflation is the arch enemy of fixed investments like Mortgage Bonds because it erodes the buying power of a Bond’s fixed rate of return. If inflation is rising, investors demand a rate of return to combat the faster pace of erosion due to inflation, causing interest rates to rise as they did throughout much of last year. Since lower inflation typically helps both Mortgage Bonds and mortgage rates improve, these signs of easing inflation are welcome, mild though they were.

Wholesale Inflation Hotter Than Expected

The Producer Price Index (PPI), which measures inflation on the wholesale level, rose by a greater than expected 0.7% in January. On a year-over-year basis, PPI decreased from an upwardly revised 6.5% to 6%. Core PPI, which strips out volatile food and energy prices, rose to a hotter than expected 0.5%. On an annual basis, Core PPI declined from an upwardly revised 5.8% to 5.4%.

What’s the bottom line? These inflation readings were disappointing because they were higher than expected, but inflation is still subsiding and the annual readings are moving lower in the right direction. In fact, the progress made on the producer side of inflation is notable. At its peak last March, PPI was at 11.6% year over year and is now almost half that amount at 6%.

Household Formations Continue to Outpace Completions

The start of the new year brought a chill to homebuilding as Housing Starts, which measure the start of construction on homes, fell 4.5% from December to January. More significantly, starts for single-family homes declined 4.3% from December and 27.3% from January of last year. Building Permits for single-family homes, which are indicative of future supply, also fell 1.8% for the month and 40% year over year. This is a disappointment because single-family homes are in such high demand among buyers and the data suggests ongoing tight supply will continue.

What’s the bottom line? Builders are on pace to complete 1.406 million homes this year, yet household formations are projected to total 1.9 million. This ongoing disparity between supply and demand should continue to be supportive of prices, especially when we see more hibernating buyers resume their home search. The dynamics in today’s market are very different from the housing bubble, where demand was waning but the supply of new homes was significantly increasing.

Builder Confidence Rose for Second Straight Month

The National Association of Home Builders (NAHB) Housing Market Index, which is a near real-time read on builder confidence, rose seven points to 42 in February. All three components of the index posted gains, with current sales conditions rising six points to 46, sales expectations for the next six months up eleven points to 48, and buyer traffic moving six points higher to 29. Any reading above 50 on this index, which runs from 0 to 100, signals expansion while readings below 50 signal contraction.

What’s the bottom line? The rise in confidence among home builders in both January and February of this year follows declines seen every month last year. February’s reading also marks the strongest one-month gain in 10 years. This could signal the start of an upward trend, which would be encouraging for buyers facing limited supply. NAHB Chief Economist Robert Dietz noted, “While the HMI remains below the breakeven level of 50, the increase from 31 to 42 from December to February is a positive sign for the market.”  

Continuing Jobless Claims Continue to Creep Higher

The latest Initial Jobless Claims data showed that 194,000 people filed for unemployment benefits for the first time, which is a decline of 1,000 from the previous week. Continuing Claims, which measure people who continue to receive benefits after their initial claim is filed, rose 16,000 to 1.696 million, the highest amount since the latter part of December.

What’s the bottom line? We are continuing to see a tight labor market where companies are doing their best to hold on to workers. However, Continuing Claims have risen by 350,000 since the low reached last September, which also suggests it’s becoming harder for many to find a job if they are let go. 

Was the Rebound in Retail Sales an Anomaly?

After the disappointing holiday shopping season in November and December, Retail Sales rebounded in January, rising a much higher than expected 3%. Interestingly, much of the gain came from department stores, where sales rose almost 18%. Were shoppers returning holiday gifts and purchasing items while they were in the store? Did warmer than expected weather around the country play a role? This figure was an outlier and is worth monitoring in next month’s report.

What to Look for This Week

After the market closures Monday for the Presidents Day holiday, important housing and inflation reports are ahead.

Existing Home Sales for January will be reported on Tuesday, while New Home Sales follow on Friday. On Thursday, look for the latest Jobless Claims data along with the second reading for fourth quarter 2022 GDP. Friday brings January’s reading for the Fed’s favored inflation measure, Personal Consumption Expenditures.

The minutes from the Fed’s latest meeting will also be released on Wednesday and these always have the potential to be market moving.

Technical Picture

Mortgage Bonds were able to remain above the important floor at 99.845 last Friday and they ended last week trading in a range between the 99.845 floor and a ceiling at their 100-day Moving Average. The 10-Year was rejected from the ceiling at the 3.908% Fibonacci level and has moved lower.

Find First Time Home Buyer content for your buyers here: First Time Buyer Information

Mortgage Rates Increase Slightly

Freddie Mac Primary Mortgage Market Survey^® as of February 9, 2023

Following an interest rate hike from the Federal Reserve and a surprisingly strong jobs report, mortgage rates increased slightly this week. The 30-year fixed-rate continues to hover close to six percent, and interested homebuyers are easing their way back to the market just in time for the spring homebuying season.

• Current Mortgage Rates Data Since 1971​xlsx

Week of February 6, 2023 in Review

News on home price appreciation, mixed auction results, and tough talk from central banks around the world highlighted an otherwise quiet week:

• Does the Future Look Good for Home Prices?
• Central Bank Tough Talk Based on Misunderstanding
• CEOs Feel a Recession Coming
• Jobless Claims Reflect Slower Pace of Hiring
• Important Auctions Bring Mixed Results

Does the Future Look Good for Home Prices?

CoreLogic’s Home Price Index showed that home prices nationwide fell by 0.4% from November to December but they were 6.9% higher when compared to December of 2021. This annual appreciation reading declined from 8.6% in November but is still solid. CoreLogic forecasts that home prices will drop 0.2% in January but rise 3% in the year going forward. 

What’s the bottom line? CoreLogic’s Chief Economist Selma Hepp said that while home prices in December “continued to fall from November, the rate of decline was lower than that seen in the summer and still adds up to only a 3% cumulative drop in prices since last spring’s peak.” This is a far cry from a housing crash of 20% that some in the media have been predicting.

And while CoreLogic has reported slightly negative readings month to month, they still forecast 3% appreciation nationwide over the next year, which can be meaningful for wealth creation.

In addition, Zillow and Pulsenomics released their Home Price Expectations Survey for the fourth quarter of last year. Survey participants included 117 of the top economists in the country and they were asked about their expectations for home price appreciation over the next five years.

Results showed that respondents’ average expected appreciation over the next five years is 23.3% cumulatively. To quantify this, if someone bought a $500,000 home and we saw 23% appreciation over the next five years, they would gain $115,000 in appreciation alone. This data shows there is great opportunity ahead in the housing market, despite the negativity you may hear in the media.

Central Bank Tough Talk Based on Misunderstanding

During an interview last Tuesday at the Economic Club of Washington, DC, Fed Chair Jerome Powell stressed that the Fed would be data dependent as they evaluate how to best fight inflation. Powell noted, “If we continue to get, for example, strong labor market reports or higher inflation reports, it may well be the case that we have to do more and raise rates more than is priced in.”

The Fed has hiked its benchmark Fed Funds Rate eight times since last March, bringing it to a range of 4.5% to 4.75%. The Fed Funds Rate is the interest rate for overnight borrowing for banks and it is not the same as mortgage rates. When the Fed hikes the Fed Funds Rate, they are trying to slow the economy and curb inflation.

Powell’s remarks followed tough central bank talk from the Bank of England and European Central Bank. Both the BoE and ECB said that the risk of overtightening is dwarfed by the risk of doing too little. They also said that monetary policy needed to continue to show teeth until inflation moves lower to their target.

What’s the bottom line? The central bank commentary came on the heels of the much stronger than expected U.S. Jobs Report for January that was reported by the Bureau of Labor Statistics (BLS) on February 3. However, it is based on a misunderstanding of the data. 

The BLS’ report showed that there were 517,000 jobs created last month, blowing out estimates, but there were large seasonal adjustments, population controls and new benchmarks that greatly impacted the data. On an unadjusted basis, payrolls actually declined by 2.5 million last month. 

In addition, the BLS report was in stark contrast to other data that has been released such as ADP’s Employment Report, which showed only 106,000 job creations in January. Plus, S&P Global’s U.S. Services Purchasing Managers’ Index, which is a monthly survey of senior executive at private sector companies, also showed that “hiring has almost ground to a halt as firms reassess their payroll needs in light of the weaker demand environment.”

CEOs Feel a Recession Coming

The Conference Board released their Measure of CEO Confidence for the first quarter, which is a survey based on CEOs’ perceptions of current and expected business and industry conditions. The responses among the 142 CEOs who participated in the survey during the second half of January showed that CEOs remain cautious about the economy in 2023. Overall, the index came out at 43 and while this is above the 32 seen in the fourth quarter of last year, it is still below 50, which means there were more negative responses than positive. 

What’s the bottom line? Among the notable statistics, 93% of CEOs reported that they are preparing for a recession in 2023, although most think it will be brief and shallow. In addition, 55% of CEOs believe that a global recession is the greatest challenge for their companies. Regarding their plans for hiring, 37% of CEOs expect to expand their workforce over the next 12 months, which is down from 44% in the fourth quarter. Meanwhile, 48% said they are reducing hiring plans, including selective hiring freezes.

Jobless Claims Reflect Slower Pace of Hiring

The number of people filing for unemployment benefits for the first time rose by 13,000, as there were 196,000 Initial Jobless Claims reported in the latest week. While this was higher than estimates, it is still low on a historical basis. Continuing Claims, which measure people who continue to receive benefits after their initial claim is filed, rose 38,000 to 1.688 million, the highest amount since the latter part of December.

What’s the bottom line? We are continuing to see a tight labor market where companies are doing their best to hold on to workers. However, Continuing Claims have risen by more than 300,000 over the last four months, which also suggests it’s becoming harder for many to find a job if they are let go. 

 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.

Wednesday’s 10-year Note auction was met with very strong demand. It seemed that traders wanted to benefit from the spike in yields which followed the misleading Jobs report, as expected lower inflation data that will be released this week will likely send yields lower. While this strong auction demand boosted Mortgage Bonds Wednesday afternoon, the poor demand at Thursday’s 30-year Bond auction added downside pressure to Bonds.

What to Look for This Week

After last week’s quiet economic calendar, this week brings crucial inflation, housing and manufacturing reports.

We’ll get an update on inflation when January’s Consumer Price Index is reported on Tuesday. Look for the Producer Price Index on Thursday, which will give us news on wholesale inflation.

On Wednesday, the National Association of Home Builders Housing Market Index will provide a near real-time read on builder confidence for this month. Housing Starts and Building Permits for January will be reported on Thursday.

February’s manufacturing data for the New York and Philadelphia regions will be released on Wednesday and Thursday, respectively.

Also of note on Tuesday, we’ll learn how small business owners were feeling last month via the National Federation of Independent Business Small Business Optimism Index. Retail Sales data for January will be released on Wednesday while the latest Jobless Claims remain important to monitor when that data is released as usual on Thursday.

Technical Picture

Mortgage Bonds ended last week battling support at the 100-day Moving Average. A substantial break lower could lead to Bonds testing the next level of support at 100.094. The 10-year has broken above resistance at its 100-day Moving Average and is currently trading at around 3.75%. There is a lot of room for yields to move higher before the next ceiling all the way up at the 3.908% Fibonacci Level.

Mortgage Rates Continue to Shift Down

Freddie Mac Primary Mortgage Market Survey^® as of February 2, 2023

Mortgage rates inched down again, with the 30-year fixed-rate down nearly a full point from November, when it peaked at just over seven percent. According to Freddie Mac research, this one percentage point reduction in rates can allow as many as three million more mortgage-ready consumers to qualify and afford a $400,000 loan, which is the median home price.

Current Mortgage Rates Data Since 1971​xlsx

Week of January 30, 2023 in Review

The Fed hiked its benchmark Fed Funds Rate, while there’s more to January’s job data than the headlines suggest. Plus, find out what the latest news on home price appreciation really means, all ahead in these stories:

• Are More Fed Rate Hikes Ahead This Year?
• January Job Growth Not as Strong as It Appears
• Private Payrolls Disappoint in January
• Jobless Claims Reflect Tight Labor Market
• Talk of Housing Crash Not Supported by Appreciation Data

Are More Fed Rate Hikes Ahead This Year?

As expected, the Fed hiked its benchmark Fed Funds Rate by 25 basis points at its meeting last Wednesday. The Fed has now hiked the Fed Funds Rate eight times since last March, bringing it to a range of 4.5% to 4.75%. The Fed Funds Rate is the interest rate for overnight borrowing for banks and it is not the same as mortgage rates. When the Fed hikes the Fed Funds Rate, they are trying to slow the economy and curb inflation. 

What’s the bottom line? In the press conference following the meeting, Fed Chair Jerome Powell acknowledged that inflation has been declining, which he noted was encouraging. However, he said the Fed has more work to do to ensure inflation is on a sustained downward path.

Powell signaled that “a couple” more hikes to the Fed Funds Rate would be appropriate, with the next decision coming at their meeting on March 21-22. He emphasized that the Fed would continue to make their “decisions meeting by meeting, taking into account the totality of incoming data and their implications for the outlook for economic activity and inflation.”

January Job Growth Not as Strong as It Appears

The Bureau of Labor Statistics (BLS) reported that there were 517,000 jobs created in January, which was much stronger than estimates. Revisions to the data from November and December added 71,000 jobs in those months combined. The unemployment rate declined from 3.5% to 3.4%, which is the lowest since 1969.

What’s the bottom line? There are two reports within the Jobs Report and there is a fundamental difference between them. The Business Survey is where the headline job number comes from and it’s based predominately on modeling and estimations. The Household Survey, where the Unemployment Rate comes from, is derived by calling households to see if they are employed. The Household Survey has its own job creation component and it showed that there were 894,000 new jobs created last month.

While these job growth figures appear strong, it’s important to note that there were big adjustments to how the data was calculated in January. New seasonal factors, new benchmarks and new population estimates/controls were instated. If we remove these adjustments, the number of job creations in the Household Survey would have only been 84,000 versus the 894,000 that were reported.

In addition, looking deeper at the face value numbers, of the 894,000 job creations in the Household Survey, 606,000 were from part-time workers.

Considering the number of large layoffs that have been reported across the country, along with the revisions, new benchmarks and population adjustments made to the reporting by the BLS, the labor sector likely isn’t as strong as their January Jobs Report suggests.

Private Payrolls Disappoint in January

Private payrolls came in much lower than expected last month, as the ADP Employment Report showed that there were just 106,000 jobs created in January. The construction sector accounted for 24,000 jobs lost, which is understandable given the slowdown we have seen among homebuilders. Small businesses with under 50 employees were hit hardest, as they lost 75,000 jobs, while large firms with 500 or more employees posted 128,000 job gains.

ADP also reported that annual pay for job stayers increased 7.3% year over year, which was unchanged from the previous report. Job changers saw an average increase of 15.4%, up from 15.2%.

What’s the bottom line? Nela Richardson, chief economist for ADP, said, “In January, we saw the impact of weather-related disruptions on employment during our reference week.” ADP uses the week that includes the 12th to collect payroll sampling data each month. They blamed the extreme weather during that timeframe in January, including snow in the Midwest and flooding in California, for the weaker than expected report. However, it was mild in other parts of the country and there are supposed to be seasonal adjustments reflected in the data, suggesting that weather was not the only contributing factor to the report.

Jobless Claims Reflect Tight Labor Market

The number of people filing for unemployment benefits for the first time declined for the third straight week, as Initial Jobless Claims dropped by 3,000 to 183,000. Continuing Claims, which measure people who continue to receive benefits after their initial claim is filed, fell 11,000 to 1.655 million.

What’s the bottom line? We are continuing to see a tight labor market where companies are doing their best to hold on to workers. However, Continuing Claims have risen by nearly 300,000 over the last four months, which also suggests it’s becoming harder for many to find a job if they are let go. 

Talk of Housing Crash Not Supported by Appreciation Data

The Case-Shiller Home Price Index, which is considered the “gold standard” for appreciation, showed home prices fell 0.6% from October to November but they were 7.7% higher when compared to November of 2021. This annual reading is a decline from the 9.2% gain reported in October.

The Federal Housing Finance Agency (FHFA) also released their House Price Index, which revealed that home prices fell 0.1% from October to November. While prices rose 8.2% from November 2021 to November 2022, this was a decline from the 9.8% annual increase reported in October. FHFA’s report measures home price appreciation on single-family homes with conforming loan amounts, which means it most likely represents lower-priced homes. It also differs from Case-Shiller’s data, in that it does not include cash buyers or jumbo loans.

What’s the bottom line? Home prices have been softening nationwide, but S&P DJI Managing Director Craig J. Lazzara noted that they are only down 3.6% from their peak last June. This is a far cry from a housing crash of 20% that some in the media are predicting. 

In addition, home prices in Case-Shiller’s 10-City and 20-City Indexes are down 5% from their peak, showing that prices in these major cities are declining a bit more than they are in the nation overall. Prices in some of these locations were a bit overheated and are now giving back some gains. When removing those cities, prices around the rest of the country are flatter from the peak overall.

What to Look for This Week

This week’s economic calendar is quiet when compared to last week’s plentiful headlines. Jobless Claims remain important to monitor when they are released as usual on Thursday. 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 ended last week battling with a dual floor of support at their 25-day and 50-day Moving Averages. The 10-year shot up to 3.53% on Friday, which is right its 25-day and 50-day Moving Averages, but was rejected lower.   

Mortgage Rates Trend Down – Pending Home Sales Up!

Pending Home Sales rose 2.5% from November to December, ending sixth straight months of declines but sales are still 33.8% lower than they were just a year ago. Inflation continues to improve and that’s good news for interest rates because it is the arch enemy of bonds and that’s primarily where we derive mortgage rates–those have been on the decline, with the 30 year mortgage down nearly 1% since early November. We have the Fed meeting and announcing their monetary policy on Wednesday and the jobs report on Friday. Could be a huge week for mortgage rates!

Freddie Mac Primary Mortgage Market Survey® as of January 26, 2023

Mortgage rates continue to tick down and, as a result, home purchase demand is thawing from the months-long freeze that gripped the housing market. Potential homebuyers remain sensitive to changes in mortgage rates, but ample demand remains, fueled by first-time homebuyers.

• Current Mortgage Rates Data Since 1971​xlsx

Week of January 23, 2023 in Review

Housing activity moved higher in December, inflation continues to cool, and more recession signals are flashing:

• Inflation Turning the Corner
• Pending Home Sales Rise for First Time in Six Months
• New Home Sales Ticked Higher in December
• Caveats to Positive Fourth Quarter GDP
• Initial Jobless Claims Decline for Second Consecutive Week
• Economic Slowdown and Recession Signs Continue

Inflation Turning the Corner

The Fed’s favorite measure of inflation, Personal Consumption Expenditures (PCE), showed that headline inflation rose 0.1% in December, while the year-over-year reading declined from 5.5% to 5%. Core PCE, which strips out volatile food and energy prices, rose by 0.3% with the year-over-year change falling from 4.7% to 4.4%.

What’s the bottom line? Headline PCE has declined nearly 2% after peaking last June, while Core PCE is down 1% after reaching 5.4% last February. This is a meaningful improvement in inflation, and the decline is expected to continue. Inflation is calculated on a rolling 12-month basis, so the total of the past 12 monthly inflation readings gives us the year-over-year rate of inflation. Readings from the start of last year are higher comparisons, so if we continue to see lower monthly inflation readings, the annual rate of inflation will continue to move lower.

Pending Home Sales Rise for First Time in Six Months

Pending Home Sales rose 2.5% from November to December, ending sixth straight months of declines. However, sales were 33.8% lower than they were a year earlier. This is a critical report for taking the pulse of the housing market, as it measures signed contracts on existing homes, which represent around 90% of the market.

What’s the bottom line? Lawrence Yun, chief economist for the National Association of Realtors, noted, “This recent low point in home sales activity is likely over. Mortgage rates are the dominant factor driving home sales, and recent declines in rates are clearly helping to stabilize the market.”

New Home Sales Ticked Higher in December

New Home Sales, which measure signed contracts on new homes, rose 2.3% in December to a 616,000-unit annualized pace, which was in line with estimates. Note that there was a negative revision to November’s sales that made December’s gain appear a bit bigger.

What’s the bottom line? December saw a slight decline in mortgage rates, so it makes sense that buyer activity moved higher. And while the median price for new homes fell from $459,000 in November to $442,100 in December, this is not the same as a decline in home prices. The median price simply means half the homes sold were above that price and half were below it, and this figure can be skewed by the mix of sales among lower-priced and higher-priced homes.

Looking closely at inventory, there were 461,000 new homes for sale at the end of December, which equates to a 9 months’ supply. However, only 71,000 were completed, with the rest either not started or under construction. The number of completed homes equates to a 1.4 months’ supply, well below a balanced market and showing inventory remains tight.

Caveats to Positive Fourth Quarter GDP

The first reading of Gross Domestic Product (GDP) for the fourth quarter of last year showed that the U.S. economy grew by 2.9% annualized, which was higher than estimates. Note that this is the first of three readings and there can be significant revisions when the second and final readings are released on February 23 and March 30, respectively.

What’s the bottom line? GDP functions as a scorecard for the country’s economic health. Last year, GDP was negative for both the first and second quarters before turning positive in the third. While the positive initial reading for the fourth quarter sounds like good news, there is more to the data than this headline number.

Looking at the internals, inventory build played a big role in the overall figure. Recent data showed that Personal Spending declined in November and December while Retail Sales were weak during the holiday shopping season, leaving companies with excess inventory. As a result, companies may start to slash prices, which could become a drag on the economy and impact GDP in the first and second quarters of this year.

Initial Jobless Claims Decline for Second Consecutive Week

The number of people filing for unemployment benefits for the first time fell by 6,000 in the latest week, as 186,000 Initial Jobless Claims were reported. This marked the second week in a row that Initial Jobless Claims declined, keeping them below 200,000. Continuing Claims, which measure people who continue to receive benefits after their initial claim is filed, rose 20,000 to 1.675 million.

What’s the bottom line? Data from the latest Bureau of Labor Statistics Jobs Report showed that companies are reducing workers’ hours as opposed to outright letting them go, which may be contributing to the decline in initial unemployment claims. However, Continuing Claims have risen by more than 300,000 over the last four months, which suggests it’s becoming harder for many to find a job if they are let go. 

Economic Slowdown and Recession Signs Continue

Several reports released last week continue to show that the economy is slowing. The National Association for Business Economics released their January 2023 Business Conditions Survey of 60 of its members firms. The responses showed that profit margins remain under pressure and hiring plans turned negative for the first time since the pandemic. Just over half of respondents felt there was a 50% or higher chance of a recession over the next year. 

The Conference Board also released their Leading Economic Index (LEI) for December showing that it fell 1%, following a 1.1% decline in November. This report is a composite of economic indexes and can signal peaks and troughs in the business cycle. Of note, the LEI was down 4.2% from June through December of last year, and it has also been in contraction for 10 months in a row. The Conference Board explained how the rollover in indicators and trajectory over the last six months is a recession signal that has been highly accurate historically. 

We are also continuing to see inversions on the yield curve, with 1-month, 3-month, 1-year and 2-year yields all moving higher than 10-year yields. This is unusual as typically you would expect to receive a higher rate of return if you put your money away for 10 years when compared to lesser timeframes. An upside-down yield curve has been a historically accurate recession indicator, as it is a symptom that the economy is slowing.

What’s the bottom line? The economy has been slowing in large part because of aggressive action taken by the Fed last year to try to tame runaway inflation, including seven hikes to its benchmark Fed Funds Rate. This is the overnight borrowing rate for banks, and it is not the same as mortgage rates. Raising the cost of borrowing on certain items slows the economy down and incentivizes savings rates, driving down demand and thus curbing inflation, which has begun to cool per recent reports.

Investors will be closely watching what actions the Fed takes to fight inflation at their meeting which begins Tuesday, with the Monetary Policy Statement and press conference coming on Wednesday.

What to Look for This Week

Updates on housing, jobs and the Fed meeting highlight a busy week ahead. On Tuesday, look for home price appreciation data for November from the Case-Shiller Home Price Index and the Federal Housing Finance Agency (FHFA) House Price Index.

From the labor sector, ADP’s Employment Report will give us an update on private payrolls for January when it is released on Wednesday. The latest Jobless Claims data will be reported on Thursday while Friday brings the Bureau of Labor Statistics Jobs Report for January, which includes Non-farm Payrolls and the Unemployment Rate.

As noted above, the Fed’s two-day meeting begins Tuesday, with the Monetary Policy Statement and press conference coming on Wednesday.

Technical Picture

Mortgage Bonds have been trading somewhat sideways since the beginning of the year, trapped between a dual floor of support formed by the 25-day and 50-day Moving Averages and overhead resistance at the formidable 101.671 Fibonacci level. This is a wide range, so we can see some big price fluctuations while Bonds remain in it. The 10-Year is trading right in the middle of a range comprised of a ceiling at the 25-day and 50-day Moving Averages and a floor at the 3.431% Fibonacci Level.   

Mortgage Rates Continue to Decrease

Freddie Mac Primary Mortgage Market Survey^® as of January 19, 2023

As inflation continues to moderate, mortgage rates declined again this week. Rates are at their lowest level since September of last year, boosting both homebuyer demand and homebuilder sentiment. Declining rates are providing a much-needed boost to the housing market, but the supply of homes remains a persistent concern.

• Current Mortgage Rates Data Since 1971​xlsx

Week of January 16, 2023 in Review

Recent housing data brought some better than expected news, while wholesale inflation cooled in December. The contraction in manufacturing continued this month. Here are the details:

• Sales of Existing Homes Higher Than Expectations
• Two Sides to Housing Starts Data
• Is the Uptick in Builder Confidence a Turning Point for Housing?
• Wholesale Inflation Much Cooler Than Estimates
• Jobless Claims Continue to Reflect Slower Pace of Hiring
• Manufacturing and Retail Sales Data Point to Economic Slowdown

Sales of Existing Homes Higher Than Expectations 

Existing Home Sales fell 1.5% from November to December to a 4.02 million unit annualized pace, per the National Association of Realtors (NAR). However, this was a smaller decline than economists had forecasted. Sales were also 34% lower when compared to December of last year. This is a critical report for taking the pulse of the housing market, as it measures closings on existing homes, which represent around 90% of the market.

What’s the bottom line? Inventory continued to move lower after peaking over the summer as part of the normal seasonal build, falling for the fifth straight month to 970,000. This is a 13.4% decline from November and the equivalent of a 2.9 months’ supply.

But inventory is even tighter than that figure implies, as there were only 690,000 “active listings” in December, meaning that 29% of the “inventory” in the Existing Home Sales report is under contract and not truly available. This data speaks to ongoing demand for homes, even with the decline in sales, as a normal market has 25% of inventory under contract. 

Demand can also be seen in the pace of sales, as homes are still selling quickly when priced correctly. Average days on the market increased slightly from 24 days in November to 26 days in December, while 57% of homes sold last month were on the market for less than a month.

Looking at the data as a whole, low inventory and ongoing housing demand will continue to limit the downside in home prices.

Two Sides to Housing Starts Data

Housing Starts, which measure the start of construction on homes, fell 1.4% from November to December. Starts for single-family homes, which are the most important because they are in such high demand among buyers, were up 11.3% monthly but they are still 25% lower when compared to December 2021. Building Permits for single-family homes, which are indicative of future supply, also fell 6.5% for the month and 34.7% year over year.

What’s the bottom line? While construction has slowed, December’s data was better than expected. In addition, the low supply environment in new homes (and in existing homes as noted above) will continue to be supportive of prices. This is very different from the housing bubble, where demand was waning but the supply of new homes was significantly increasing.

Is the Uptick in Builder Confidence a Turning Point for Housing?

The National Association of Home Builders (NAHB) Housing Market Index, which is a near real-time read on builder confidence, rose four points to 35 in January. Among the components of the index, current sales conditions rose four points to 40, buyer traffic increased three points to 23, and sales expectations for the next six months moved two points higher to 37. Any reading above 50 on this index, which runs from 0 to 100, signals expansion while readings below 50 signal contraction.

What’s the bottom line? The rise in confidence among home builders this month follows declines seen every month last year. NAHB Chairman Jerry Konter noted, “It appears the low point for builder sentiment in this cycle was registered in December, even as many builders continue to use a variety of incentives, including price reductions, to bolster sales.” He added, “The rise in builder sentiment also means that cycle lows for permits and starts are likely near, and a rebound for home building could be underway later in 2023.”

Wholesale Inflation Much Cooler Than Estimates

The Producer Price Index (PPI), which measures inflation on the wholesale level, fell by a greater than expected 0.5% in December. On a year-over-year basis, PPI decreased from a downwardly revised 7.3% to 6.2%. Core PPI, which strips out volatile food and energy prices, was in line with estimates with a 0.1% increase, though the previous report was revised lower. On an annual basis, Core PPI declined from 6.2% to 5.5%.

What’s the bottom line? Overall, inflation continues to subside and the annual readings are moving lower in the right direction. In fact, the progress made on the producer side of inflation is notable. At its peak last March, PPI was at 11.7% year over year and is now almost half that amount at 6.2%.

Cooling inflation is a welcome sign for several reasons. 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 saw through much of last year.

Jobless Claims Continue to Reflect Slower Pace of Hiring

Initial Jobless Claims declined by 15,000 in the latest week, as the number of people filing for unemployment benefits for the first time fell to 190,000. Continuing Claims, which measure people who continue to receive benefits after their initial claim is filed, rose 17,000 to 1.647 million.

What’s the bottom line? Continuing Claims have been trending higher since mid-September when they were at 1.346 million. This reflects a potential slowdown in the pace of hiring, suggesting it’s becoming harder for many to find a job once they’re let go. 

Manufacturing and Retail Sales Data Point to Economic Slowdown

Recent reports offer more signals that the economy is slowing. In the manufacturing sector, there were negative readings (which signal contraction) reported for the New York and Philadelphia regions this month. The Empire State Index contracted sharply to -32.9, which was much worse than estimates, while the Philadelphia Fed Index remained in contraction territory for the fifth straight month. 

Meanwhile, Retail Sales were also down 1.1% in December, which was a bigger decline than economists had forecasted, showing a disappointing end to the holiday shopping season. 

What to Look for This Week

Thursday brings a full slate of economic news, including December’s New Home Sales and Durable Goods, the first reading on fourth quarter 2022 GDP, and the latest Jobless Claims.

On Friday, look for December’s Pending Home Sales along with the Fed’s favored inflation measure, Personal Consumption Expenditures.

Technical Picture

Mortgage Bonds ended last week trading in the middle of a range comprised of the 101.671 Fibonacci ceiling and a floor at the 25-day Moving Average. The 10-year broke above the ceiling at the 3.431% Fibonacci level. There is a lot of room for yields to worsen before reaching the next ceiling at the 25-day Moving Average.