Economic & Housing Update May 12, 2023
Inflation progress is too slow to result in falling mortgage rates, but homebuyers remain hopeful they’ll come down soon.
Summary:
Mortgage rates fell slightly to 6.35%, according to Freddie Mac. Mortgage applications jumped 4.8% to the 2nd highest level in 3 months as rates trend lower.
Fannie Mae’s Home Purchase Sentiment Index increased in April to its highest level since May 2022, jumping 5.5 points to 66.8 on improving expectations of mortgage rates.
Headline inflation fell to 4.9% in April 2023, the lowest since April 2021, and below market forecasts of 5%. Core consumer price inflation (less food and energy), has been running higher than overall and only ticked down to 5.5% in April 2023, as expected. Consumer sentiment fell sharply in May on concerns about the trajectory of the economy.
This week we received fresh data on inflation through April and the results were underwhelming. Overall, headline inflation is now under 5% for the first time in two years, which is great progress. But after stripping out volatile food and energy, prices are up 5.5% and the progress is less exciting (see chart). We’re still far away from the 2% target range the Fed is aiming for. Thus it will likely take longer than markets currently expect for the Fed to begin cutting interest rates.
If inflation fails to come down faster and the Fed lacks projections of rate cuts, then we are less likely to see long-term rates fall without economic calamity. More bank failures or rising unemployment (jobless claims continued to jump this week) could put downward pressure on long-term rates, but that is less desirable. We want the yield on 10 year treasuries and mortgage rates to come down due to better than expected progress on core inflation. Nonetheless, it is safe to say that peak inflation and interest rates are in the rearview mirror. This has resulted in improving homebuyer sentiment (see chart), according to Fannie Mae’s National Housing Survey. The core reason for the jump is the improvement in expectations for mortgage interest rates in the next six months.
Interestingly, consumers more broadly are feeling the opposite regarding the economy. While homebuyers are hopeful about rate declines, consumers are concerned about the trajectory of the economy. Consumer sentiment fell sharply in May (see chart), according to preliminary consumer sentiment data from University of Michigan. While economic growth right now is holding up well, One year-ahead expectations for the economy dropped 23% from last month. News of continued bank failures and discussions of potentially breaching the debt ceiling all play a role. Concerning expectations can often be a self-fulfilling prophecy. Said another way in the words of Franklin D. Roosevelt, “the only thing we have to fear is fear itself.”
New housing data:
The Fannie Mae Home Purchase Sentiment Index® (HPSI) increased in April to its highest level since May 2022, jumping 5.5 points to 66.8. All six of the HPSI’s components increased month over month, most notably the component associated with consumers’ expectations of mortgage rates.
Mortgage credit availability decreased by 0.9% to 99.6 in April (indicating a tightening of lending standards, and reflecting the tightening in broader credit conditions stemming from recent banking sector challenges) to the lowest level since January 2013 according to the Mortgage Credit Availability Index (MCAI), from the Mortgage Bankers Association (MBA). “The contraction was driven by reduced demand for loan programs such as certain adjustable-rate mortgages loans, cash-out and streamline refinances, and those with lower credit score requirements. Government credit supply decreased for the third consecutive month, as industry capacity continues to adjust to significantly reduced origination volume, along with the expectations of a weakening economy later this year.”
The delinquency rate for mortgage loans decreased to 3.56 percent of all loans outstanding at the end of the first quarter of 2023 on one-to-four-unit residential properties—its lowest level for any first quarter since MBA’s survey began in 1979, according to MBA’s National Delinquency Survey.
The MBA Purchase Index increased 4.8% to 173.7 points in the week ended May 5th 2023. The adjustable-rate mortgage (ARM) share of activity decreased to 6.8 percent of total applications. The savings for a 5/1 ARM loan are fairly elevated as the average contract interest rate for 5/1 ARMs decreased to 5.35%, about one percentage point lower than conforming 30 year fixed rates.
This week, mortgage rates fell to 6.35%, according to Freddie Mac. Daily rates from MND ended the week at 6.55%, roughly the same as a week earlier.
Redfin’s weekly report revealed that “New listings of homes for sale dropped 19% year over year during the four weeks ending May 7, contributing to an unseasonal monthly decline in total inventory. There were 16% fewer pending home sales than a year earlier, reflecting the lack of listings.” The median home sale price was down 2.7% from a year earlier—the 11th-straight four-week period of declines.
New economic data (source):
The annual (headline) inflation rate fell to 4.9% in April 2023, the lowest since April 2021, and below market forecasts of 5%. Food prices grew at a slower rate while energy costs fell further. Also, shelter cost, which accounts for over 30% of the total CPI basket, slowed for the first time in two years (8.1% vs 8.2%) and prices for used cars and trucks declined again. Compared to the previous month, the CPI rose 0.4%, much higher than 0.1% in March but matching market expectations. The shelter was the largest contributor to the monthly all-items increase. Core consumer price inflation, ticked down to 5.5% in April 2023, as expected, from 5.6% in the prior month.
Producer prices increased 0.2% month-over-month in April of 2023, following a downwardly revised 0.4% drop in March and compared to market forecasts of a 0.3% rise. 80% of the general increase is due to a 0.3% rise in services cost, the biggest since November. Meanwhile, annual producer inflation eased for a 10th straight month to 2.3%, the lowest since January 2021 and the core rate fell to 3.2%.
The number of Americans filing for unemployment benefits rose by 22 thousand to 264 thousand in the week ending May 6th, the most since October 2021, and well above market expectations of 245 thousand. The result emphasized a batch of recent data that points to the softening of the US labor market.
The University of Michigan consumer sentiment fell sharply to a six-month low of 57.7 in May of 2023 from 63.5 in April, well below forecasts of 63, amid renewed concerns about the trajectory of the economy, preliminary estimates showed. The expectations gauge declined to 53.4 from 60.5 and the current economic conditions subindex fell to 64.5 from 68.2. Meanwhile, year-ahead inflation expectations receded slightly to 4.5% after spiking to 4.6% in April. On the other hand, the five-year outlook increased to 3.2%, the highest since 2011, compared to 3% last month.
Have a great weekend,
Taylor Marr