Monitoring expectations helps us predict volatility in the bond market. When inflation is expected to come in higher than usual, we proceed with caution. July’s Consumer Price Index (CPI) showed that inflation rose 0.2%, with this monthly reading coming in just below estimates. Mortgage rates jumped again last week.

On an annual basis, however, CPI increased from 3% to 3.2% last month, though this is still near the lowest level in more than two years. Core CPI, which strips out volatile food and energy prices, increased 0.2% while the annual reading declined from 4.8% to 4.7%.

“The average 30-year fixed mortgage rate, as tracked by Mortgage News Daily, hasn't been under 6.85% since May 18th. When we get the reading today, it'll likely be around 7.20%.”

— Lance Lambert, Fortune Magazine

To predict daily movement in mortgage rates, you have to understand the bond market. Mortgage rates are closely linked to the movements in the bond market, particularly government bonds such as U.S. Treasury bonds. When bond prices go up, it often leads to a downward pressure on mortgage rates. Mortgage rates go down.

Here's how it works:

1. Inverse Relationship: There is an inverse relationship between bond prices and bond yields (interest rates). When bond prices rise, bond yields (interest rates) tend to fall, and vice versa.

This relationship is based on the fact that the yield on a bond is calculated by dividing the annual interest payment (coupon) by the bond's price. As the price of a bond goes up, the yield falls, and as the price falls, the yield rises.

2. Impact on Mortgage Rates: Mortgage rates tend to move in tandem with yields on long-term government bonds. This is because the yields on government bonds serve as a benchmark for determining the interest rates in various lending markets, including mortgages.

3. Investor Demand for Bonds: When bond prices rise, it often indicates increased demand for bonds. Investors are willing to pay a higher price for bonds because they see them as a safe haven or a relatively stable investment option. This higher demand for bonds pushes bond yields lower, including the yields on government bonds.

4. Mortgage Rates Fall: Mortgage lenders typically use the yields on government bonds as a reference point when setting mortgage rates. When yields on government bonds decrease due to rising bond prices, mortgage rates tend to follow suit and move lower.

Mortgage rates may not always move in perfect lockstep with bond prices, but the relationship between the two remains a key factor in understanding mortgage rate trends.

Its critical to understand monetary policy and movement in the Fed Funds rate impacts investors, access to capital, and overall market sentiment. The rate hikes wont last forever, but we may see higher rates for a longer period of time. Higher mortgage rates means less demand. As long as the housing supply remains low, buying a home is smart move.

This Wednesday, Fed Minutes will be released. We will gain insights on the direction the Fed is headed as it related to more hikes. The Fed’s decision is heavily influenced by the job market.

Current market expectations for path of the Fed Funds Rate:

• Sep 20, 2023: Pause

• Nov 1, 2023: Pause

• Dec 13, 2023: Pause

• Jan 31, 2024: Pause

• Mar 20, 2024: Pause

• May 1, 2024: 25 bps cut to 5.00-5.25%

• Additional cuts to 4.17% by Jan 2025

The Black Knight Home Price Index reached a historic high in June, with nearly every major market experiencing month-over-month growth. This indicates a robust increase in home prices, with a 0.7% rise in June and a 0.8% increase on an annual basis. The first six months of the year have seen an overall appreciation of 2.9%. If this pace continues, home prices are projected to appreciate by 5.8% for the entire year of 2023.

This upward trajectory in home prices aligns with findings from other reputable sources such as Case-Shiller, CoreLogic, Zillow, and the Federal Housing Finance Agency. These various indexes have also reported strong growth in home prices, which contradicts earlier predictions of a potential housing crash.

The data suggests that the housing market has remained resilient and offers opportunities for individuals to build wealth through homeownership and the subsequent appreciation of property values.

In summary, the recent surge in home prices as indicated by the Black Knight Home Price Index echoes similar positive trends reported by other housing market indices. The substantial price gains observed are a significant departure from the dire forecasts of a housing crash. This data underscores the current potential for individuals to invest in homeownership and benefit from the wealth-building opportunities associated with property appreciation.

The total value of U.S. homes hit a record $47 trillion in June as scarcity prevails in the  housing market.

This growth has effectively counteracted the $2.9 trillion decrease in value that was brought about by rising mortgage rates between June 2022 and February 2023.

The current state of the housing market is characterized by a unique set of circumstances. Despite relatively subdued demand for homes, the supply remains limited due to a lack of homeowners putting their properties up for sale. This supply-demand imbalance is a key factor contributing to the sustained high values of homes.

A significant factor in maintaining the high home values is the prevalence of the 30-year fixed rate mortgage in the United States. Many homeowners secured favorable mortgage deals during the pandemic, with rates as low as 3% for the duration of their 30-year loans. 90% of homeowners have a rate below 6%. Many are staying put unless they have an urgent need to sell.

This phenomenon created an environment for prospective home buyers to compete for a limited supply of homes, preventing a significant decline in home values.

When in doubt, revisit the fundamentals: supply & demand.

The resilient labor market has kept us out of a recession. US Non-farm payrolls have experienced 31 consecutive months of growth. The unemployment rate is currently at 3.5%, slightly above the 3.4% reading from April 2023. Jobless rates in the United States are at or near record lows as recorded since 1976. Fewer people are quitting their jobs. Payroll growth is likely to continue over the next few months because the demand for labor still exceeds the supply of work available. Hourly earnings are up 4.36% and currently outpacing inflation. As long as people are working, spending money and paying their bills on time, there will be a demand for housing.

Inflation trends are changing. After 12 months of consecutive declines in the US Inflation rate (CPI), we went from 3% in June, to 3.2% in July. We expect CPI to jump again in August. Gas/oil prices can contribute to inflation growth. The rate of change in inflation is measured from year to year, not from the prior month. The CPI reading in August 2023 is measuring the change in prices from August 2022. The reading can come in higher than expectations.

When mortgage rates first jumped out of the 2-3% range, markets took a big hit. Real Estate activity slowed down, and stock portfolio values declined. Consumer confidence was low. The headlines were screaming fear of foreclosures, bank runs, and recession. Not only did we see the opposite in the market, but we’re experiencing growth. Home prices are rising, the unemployment rate is at an all time low, and The Dow Jones just recovered ALL losses from 2022. The Dow Jones hit a new all time high in returns. Investors are happy. Sentiment about equities (stock) against bonds is at the highest its been in 24 years.

"In the business world, the rearview mirror is always clearer than the windshield."

— Warren Buffett

The American people are working, and their wages are growing:

The recent trend in Initial Jobless Claims has shown stability, staying below 230,000 for three consecutive weeks. However, there has been a notable increase of 21,000 in the most recent reporting period. With 248,000 individuals filing for unemployment benefits for the first time. This rise in claims could potentially indicate a shift in the labor market, but it's important to consider additional factors.

Continuing Claims, which represent the number of people still receiving unemployment benefits after initially filing, decreased by 8,000. This decrease is a positive sign and suggests that some individuals are finding new employment or their benefits are expiring.

The decrease in Continuing Claims can be attributed to a combination of factors, including people finding new job opportunities and the expiration of unemployment benefits. The downward trend in Continuing Claims since a peak in early April indicates that there has been some recovery in the labor market.

The relatively low levels of Initial Jobless Claims in recent weeks can be partly attributed to challenges faced by businesses in hiring qualified workers. Many businesses have reported difficulty in finding suitable candidates for their job openings.

The National Federation of Independent Business reported 92% of small businesses looking to hire in the previous month were unable to find qualified workers for their positions. This highlights the mismatch between job openings and available skilled labor.

The key question going forward is whether the recent increase in Initial Jobless Claims is a temporary anomaly or the beginning of a new upward trend. It's important to monitor subsequent reports to determine if this change in the data is indicative of broader weakness in the labor market.