IMPORTANT MARKET UPDATE

The Fed hiked their benchmark Fed Funds Rate by 25 basis points at their meeting last Wednesday, bringing it to a range of 5% to 5.25%. 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. This was the Fed's tenth hike since March of last year.

The Fed's decision to hike the Fed Funds Rate was unanimous, despite clear signs of falling inflation, forecasts of a recession, and concerns about the banking sector.

And while Fed Chair Jerome Powell stressed that the banking system is “sound and resilient,” one result of the Fed's rate hikes is the stress they have put on many regional banks. Depositors have been incented to withdraw their money and invest it in higher-yielding money market accounts or short-term treasuries. Over the last two months, three banks with a combined $550 billion in assets have failed, which is 50% more than the 511 banks that have failed since 2009. The stability of regional banks is crucial, as they make up almost 40% of all loans.

There was also a big change to the Fed's policy statement, which saw the removal of language saying they “anticipate” further rate hikes would be needed. Instead, the Fed said that going forward they would determine whether additional firming policy would be appropriate. This lays the groundwork for a pause in rate hikes at their next meeting in June, although Powell noted in his press conference that the Fed has not made that decision as of yet. He also denied the Fed would cut rates this year even though economists forecast otherwise. The markets say there's a 38% chance of a 0% hike in June.

The CPI report is in. Headline inflation is down to 4.9% from 5% this time last year, and CORE Inflation came in at 5.5%, down from 5.6%. Goldman Sachs predicted 5.1% along with JP Morgan and Bank of America estimated a 5% inflation reading. We expected to see a significant dip in shelter, but the data continues to lag. Although fewer people are spending time away from home on mini vacations, too many folks are buying used cars, and rent costs are still high. Remember, the goal is 2%. We still have a ways to go. 

Take a look at the chart below. You will see a decline in shelter costs in the upcoming CPI reports which will help. The data is still playing catch up with the CPI report.

As of last week, the average interest rate for a 30YR Fixed rate with conforming loan balances decreased to 6.48% from 6.50%. Seasonally adjusted refinance applications increased 10% to the highest level since September 2022, but remain 45% lower than one year ago. For context, at the start of the year, refinance applications were down 86%. 

Seasonally adjusted purchase applications increased by 5% compared to the previous week, but remain 32% lower than last year. 

Mortgage applications continue to rise despite current rates being above 6%. With inflation on a downward trajectory, we can expect mortgage rates to improve through the end of the year.

The big questions is, can inventory keep up with demand? 

Take a look at the chart below displaying mortgage rates over time. After adjusting for inflation, U.S. home prices have increased 76% since January 2000. Since March of 2020, real house prices had increased over 18%. Even with consumer price inflation that is the highest in about 40 years, price growth has been even stronger. The dip in 2023 feels insignificant compared to how values have kept up in a near 7% mortgage rate environment. Lower rates will only increase the demand for homes, reasonably driving prices upward unless inventory picks up. Its tough to explain this to buyers and sellers who are struggling with fear and uncertainty, but the data suggests the housing market is strong.

CoreLogic's Home Price Index showed that home prices nationwide rose by 1.6% from  February to March and they were 3.1% higher when compared to March of last year. This follows February's 0.8% rise in home prices, suggesting that the housing market is at a turning point. CoreLogic forecasts that home prices will rise 0.8% in April and 4.6% in the year going forward, which is an upward revision from 3.7% in February's report. 

In addition, other prominent appreciation reports have shown that home prices are on the rise again, including those by Case Shiller (+0.2% in February), the Federal Housing Finance Agency (+0.5% in February), Black Knight (+0.5% in March) and Zillow (+0.9% in March). This is further evidence that home prices have reached an inflection point.

CoreLogic's Chief Economist Selma Hepp said, “While housing markets across the country continue to send mixed signals, prices in many large metros appeared to have turned the corner, with the U.S. recording a second month of consecutive monthly gains. At 1.6%, the month-over-month increase was twice the average seen between 2015 and 2020.”

She added that, “The monthly rebound in home prices underscores the lack of inventory in this housing cycle. In addition, while the lack of affordability generally weighs on home price growth, mobility resulting from remote working conditions appears to be a current driver of home prices in some areas of the country.”

When would now be the right time to buy?

Key Events This Week: 

PPI inflation data - Thursday 

Jobless claims data - Thursday 

Consumer sentiment data - Friday

The resilient Job Market: 

The Bureau of Labor Statistics (BLS) reported that there were 253,000 jobs created in April, which was much larger than estimates. However, substantive revisions to the data from February and March subtracted 149,000 jobs in those months combined, which tempered April's gains. The “revisions” always show up after the impact to rates. The unemployment rate fell from 3.5% to 3.4%. That is a REALLY low number. Peak unemployment during Covid was 14.7% and housing was booming. When this number came out last Friday, mortgage rates jumped.

There are two fundamentally different reports within the Jobs Report. 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 calculated by picking up the phone and calling households to see if they are employed.

The Household Survey has its own job creation component, and it showed some underlying weakness with only 139,000 new jobs created last month. Plus, the labor force decreased by 43,000, which is not a positive sign (Think supply and demand). When we combine these two factors, the unemployment rate did decline – but not because of strong job growth. It was because fewer people were out applying for jobs.

In addition, while the headline job growth number appeared strong, there were some cracks in the data. One of the biggest reasons we saw job gains was the birth/death model, where the BLS estimates hiring from new business creation relative to closed businesses. The problem with this modeling is it overestimates during the inflection point of a downturn (like we're in right now) and underestimates at the inflection of an upturn after a recession.

In April, this modeling added 378,000 jobs but it's hard to believe that many businesses were created last month in the current economic climate where there is less lending from banks.

The number of people filing for unemployment benefits for the first time rose by 13,000 in the latest week, as 242,000 Initial Jobless Claims were reported. Continuing Claims, which reflect people continuing to receive unemployment benefits after their initial claim is filed, declined by 38,000 to 1.805 million. Jobless Claims can be volatile from week to week, but they continue to trend higher. Initial Jobless Claims have remained above 200,000 since early February. The four-week average of Initial Jobless Claims, which smooths out some of the weekly fluctuation among first-time filers, has hovered around 240,000 near a yearly high in recent weeks. Meanwhile, Continuing Claims have now risen by over 500,000 since the low reached last September, which shows the challenges people are subsequently facing as they search for new employment.

Why does it matter? Because as long as the unemployment rate is at 3.4% we are at risk of more rate hikes and rising inflation. The rate of unemployment is a lead indicator of economic growth. As long as they paychecks are coming in, demand is high and people are spending money. When this slows down, it means inflation is coming down too.