Week of September 25, 2023 In Review

As September drew to a close, the economic landscape continued to evolve. From inflation to housing market dynamics and employment statistics, here's a comprehensive review of the key developments from last week:

Mortgage Rate Outlook: Expected Stability

Mortgage rates are expected to remain stable this week, with various factors contributing to this outlook:

• Inflation Trends: In August, the Personal Consumption Expenditures (PCE) data showed a headline inflation increase of 0.4%, lower than expectations. While year-over-year inflation ticked up to 3.5%, this rise was primarily due to revisions in prior reports. Core PCE, which excludes volatile food and energy prices, increased by only 0.1%, bringing the year-over-year reading down to 3.9%, the lowest level in two years.

• Federal Reserve's Role: The Federal Reserve has raised its benchmark Fed Funds Rate multiple times since March of the previous year, aiming to control inflation. While inflation remains elevated, it has made significant progress from the 7.1% peak seen last year, now standing at 3.5%. The Fed's next rate decision, scheduled for November 1, will provide insights into whether they intend to continue hiking rates.

• Housing Market: The housing market's supply-demand dynamics play a crucial role in mortgage rates. While the tight supply of both existing and new homes continues to support home prices, some potential buyers are pausing their purchases due to high rates and low inventory levels. This situation highlights the need for increased housing inventory and more favorable interest rates.

For a deeper understanding of these trends and their potential implications, let's delve into the specific developments of the past week:

Inflation Makes Progress Lower

August's PCE data revealed that inflation was on a slow decline:

• Headline inflation increased by 0.4%, falling below expectations.

• The year-over-year reading rose to 3.5%, primarily due to revisions in prior reporting.

• Core PCE, the Fed's preferred measure, increased by 0.1% in August, with the year-over-year reading dropping to 3.9%, the lowest in two years.

The Federal Reserve has been closely monitoring inflation trends as it strives to maintain price stability and foster economic growth. The progress made in lowering inflation raises questions about whether further rate hikes will be necessary.

Pending Home Sales Tumble in August

Pending Home Sales saw a significant decline in August:

• Contract signings on existing homes fell by 7.1% from July to August.

• Sales were also 18.7% below the levels seen a year earlier.

This drop in pending home sales, which reflects signed contracts, implies that closings in September will likely come in at an annualized pace of under 4 million. High mortgage rates and limited inventory are key factors contributing to this decline.

New Home Sales Hit Slowest Pace Since March

New Home Sales experienced a notable slowdown:

• Sales declined by 8.7% from July to August, reaching a 675,000-unit annualized pace.

• Although there was a positive revision to July's signed contracts, sales remain higher than the previous year.

The shortage of existing homes for sale continues to drive buyers towards the new construction market. However, more available supply of new homes is needed to meet this demand. Of the 436,000 new homes available for sale in August, only 76,000 were completed, highlighting the need for increased construction.

Record High for Home Prices

Home prices reached record highs in multiple housing market indices:

• The Case-Shiller Home Price Index reported a 0.6% rise in home prices from June to July.

• The Federal Housing Finance Agency's (FHFA) House Price Index showed an 0.8% increase in July.

These indexes indicate that home values have rebounded to new all-time highs, surpassing the previous downturn experienced in the second half of 2022. The strong pace of appreciation suggests that homeownership remains a valuable long-term investment.

Initial Unemployment Claims Remain Tame

Initial Jobless Claims experienced moderate fluctuations:

• Initial claims rose by 2,000 in the latest week, slightly above the previous week's eight-month low.

• Continuing Claims increased by 12,000, with 1.67 million people still receiving benefits after filing their initial claim.

The steady labor market conditions, with low levels of first-time unemployment claims, suggest that employers are retaining workers. Upcoming labor sector data will continue to play a pivotal role in the Federal Reserve's decisions regarding future rate hikes.

As the economic landscape continues to evolve, staying informed and monitoring these key indicators is essential for individuals and businesses alike. The upcoming Federal Reserve meeting on November 1 will provide crucial insights into the central bank's approach to interest rates and its implications for various sectors of the economy.

For additional information and detailed analysis, consider exploring the following resources and references: