A Comprehensive Review of Economic Developments and Mortgage Rate Outlook

Welcome to our weekly review of the key economic events that unfolded during the week of July 24, 2023. In the aftermath of the Fourth of July celebrations, the financial markets were ablaze with activity, triggered by labor sector reports, the Federal Reserve's rate hike decision, and notable shifts in inflation and the housing market. As we delve into the details of the significant events that shaped the week, we'll also provide an outlook on mortgage rates for the coming week, considering the latest data and market dynamics.

Is the Latest Fed Rate Hike the Last?

In a unanimous decision, the Federal Reserve hiked their benchmark Fed Funds Rate by 25 basis points during their meeting last Wednesday, bringing it to a range of 5.25% to 5.5%. While this marked the eleventh hike since March of the previous year, the question remains whether it will be the last.

Fed Chair Jerome Powell remained noncommittal during the press conference following the meeting regarding future rate hikes. Despite previously signaling two more hikes, he sounded less hawkish, leaving the possibility of a pause in September.

The Fed will closely monitor economic data before making their rate decision, including reports released after their meeting last week, such as the first reading of second-quarter GDP, which showed a stronger than estimated 2.4% annualized pace, and the latest Jobless Claims figures reflecting strength in the labor market.

Inflation Moving Lower Step by Step

June’s Personal Consumption Expenditures (PCE) data indicated a 0.2% increase in headline inflation and a decline in the year-over-year reading from 3.8% to 3%. Core PCE, which excludes volatile food and energy prices, also rose 0.2% in June, with the year-over-year reading down from 4.6% to 4.1%.

While inflation remains elevated, it has significantly improved from its peak last year, now standing at 3% on the headline reading. Lower inflation benefits both Mortgage Bonds and mortgage rates over time.

Housing Supply “Critical to Expand,” Says NAR

Pending Home Sales rose 0.3% from May to June, marking the first increase since February. However, sales were down nearly 16% from the previous year due to a lack of inventory, which declined about 14% over the same period. This scarcity of homes for sale is impacting the housing market.

Lawrence Yun, chief economist for the National Association of REALTORS® (NAR), emphasized that the presence of multiple offers indicates strong housing demand but is hindered by the lack of supply. Homebuilders are ramping up production and hiring workers to meet the demand.

Low Inventory Heightens Demand for New Homes

New Home Sales experienced a 2.5% decline from May to June, but signed contracts for both months reached their highest levels over the last year. High demand for new homes persists, yet the available supply of new construction remains below healthy levels.

Of the 432,000 new homes for sale at the end of June, only 72,000 were completed, while the rest were either not started or under construction. This limited supply relative to high demand supports continued home price appreciation and reinforces the value of homeownership as an investment.

Home Prices Turning Higher

The Case-Shiller Home Price Index showed home prices nationwide rose 0.7% from April to May, marking the fourth consecutive month of accelerating gains. Though prices were 0.5% lower compared to May 2022, it is important to note that home prices rose more sharply in the first half of 2022 than they have so far this year.

Similarly, the Federal Housing Finance Agency (FHFA) House Price Index reported a 0.7% increase in home prices from April to May and a 2.8% rise from May 2022 to May 2023. Both reports confirm that home prices are moving upward.

Mortgage rate outlook: Expected Stability

Based on the recent developments in the economy and housing market, mortgage rates are expected to remain stable in the coming week. While the Fed's rate hike and inflation data can influence market sentiment, the broader economic indicators and supply-demand dynamics are likely to maintain mortgage rates at their current levels.

What does the latest Fed rate hike mean for mortgage rates?
The recent Federal Reserve rate hike of 25 basis points brings the benchmark Fed Funds Rate to a range of 5.25% to 5.5%. While the Fed Funds Rate impacts overnight borrowing for banks, it doesn't directly dictate mortgage rates. However, mortgage rates often respond to changes in the Fed's monetary policy. If the Fed continues to hike rates, it could eventually influence longer-term interest rates, including mortgage rates. Homebuyers and homeowners should closely monitor economic indicators and Fed announcements to gauge potential impacts on mortgage rates.

How is inflation affecting mortgage rates?
Inflation has been a key factor influencing mortgage rates. When inflation rises, it erodes the purchasing power of fixed investments, like Mortgage Bonds. As a result, investors demand higher returns, leading to upward pressure on interest rates, including mortgage rates. However, the recent cooling of inflation, as seen in the June Personal Consumption Expenditures (PCE) report, where the year-over-year reading fell from 3.8% to 3%, may help stabilize mortgage rates and provide some relief to borrowers.

Is the housing market facing supply constraints?
Yes, the housing market is experiencing critical supply constraints, as evident from the rise in Pending Home Sales and the surge in demand for new homes. Low housing inventory, which is about 14% lower compared to a year ago, is significantly impacting sales and appreciation. Homebuilders are working to ramp up production, but the lack of available homes for sale is driving multiple offers and heightening demand for new construction. The limited supply of homes is also supporting home prices, making it crucial for potential buyers to stay informed about the market conditions.

Are home prices continuing to rise?
Yes, home prices are showing signs of sustained growth. The Case-Shiller Home Price Index and the Federal Housing Finance Agency (FHFA) House Price Index both indicate a rise in home prices for several consecutive months. While the year-over-year readings show minor declines compared to the sharp increases witnessed in the first half of 2022, home prices are still appreciating. Buyers should be prepared for potential price appreciation in the market and consider it as part of their long-term investment strategy.

What can homebuyers expect in terms of mortgage rates for the coming week?
Mortgage rate outlook: Expected Stability
Based on recent economic data and the Federal Reserve's cautious approach towards rate hikes, mortgage rates are expected to remain relatively stable in the coming week. The cooling inflation numbers are likely to offer support to Mortgage Bonds, helping to keep mortgage rates in check. However, it's important to remember that the market can be influenced by various factors, including economic reports, geopolitical events, and unforeseen circumstances. Homebuyers and homeowners should stay informed and work closely with their lenders to make well-informed decisions based on their financial goals and risk tolerance.

External Links, Resources, and References:

Federal Reserve: Official website of the Federal Reserve for monetary policy updates.
National Association of REALTORS®: Provides housing market statistics and insights.
Case-Shiller Home Price Index: Source for the "gold standard" of home price appreciation.
Federal Housing Finance Agency (FHFA): Offers housing finance data, including the House Price Index.
CoreLogic: Provides real estate data, analytics, and insights.
Black Knight: Provider of technology, data, and analytics for the mortgage and real estate industries.