The Cascade Team Blog

Weekly Review
Newsletter - 07/05/2022

Week of June 27, 2022 in Review

Consumer inflation remained near a 40-year high, and home purchase activity stayed strong in May. Home prices also continued to rise in April. Here’s what you need to know:

• Consumer Inflation Remains Near 40-Year High
• Home Purchase Activity Still Standing Strong
• Home Price Appreciation Remained Hot in April
• Final First Quarter GDP Reading Sparks More Recession Fears
• Keeping an Eye on Jobless Claims

Consumer Inflation Remains Near 40-Year High

The Fed’s favorite measure of inflation, Personal Consumption Expenditures (PCE), showed that headline inflation rose 0.6% in May, slightly below the estimates of 0.7%. The year over year reading remained near a 40-year high of 6.3% but did not increase as many expected. Core PCE, which strips out volatile food and energy prices and is the Fed’s real focus, rose by 0.3%, also one-tenth beneath expectations. Year over year, Core PCE decreased from 4.9% to 4.7%.

What’s the bottom line? Remember that the Fed's main tool to curb inflation is hiking its benchmark Fed Funds Rate, which is the interest rate for overnight borrowing for banks and is not the same as mortgage rates. Counterintuitively, when the Fed hikes its benchmark Fed Funds Rate, this can be good for mortgage rates because it curbs inflation.

At its June meeting, the Fed hiked the Fed Funds Rate by 75 basis points due to high inflation, which was the largest increase since 1994.

Home Purchase Activity Still Standing Strong

Pending Home Sales, which measure signed contracts on existing homes, rose 0.7% from April to May. Much stronger than the expected 4% decline. This follows the upside surprise in New Home Sales, as signed contracts on new homes also rose 10.7% in May. On a year over year basis, Pending Home Sales were down 13.6%.

What’s the bottom line? Both the New and Pending Home Sales reports reflect buyers shopping for homes in May. This time factors in much of the rise in rates we’ve seen this year. And while there is no doubt that higher interest rates are impacting demand, the fact that signed contracts for new and existing homes were higher in May, even with the rise in rates, rise in home prices and lack of inventory, shows that the purchase market remains strong.

Home Price Appreciation Remained Hot in April

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The Case-Shiller Home Price Index, considered the “gold standard” for appreciation, showed home prices rose 2.1% in April and 20.4% year over year. This annual reading is basically flat from the previous report… but still blistering hot.

The Federal Housing Finance Agency (FHFA) also released its House Price Index. This report measures home price appreciation on single-family homes with conforming loan amounts, which means it most likely represents lower-priced homes. Home prices rose 1.6% in April and 18.8% year over year. This is a slight decrease from the 19.1% rise reported for March, but again still extremely hot.

Rents are also on the rise, per Apartment List’s National Rent Report, which showed that rents increased by 1.3% in June and 14.1% year over year. Note that this report is for new rents. Renewals are rising in the high single digits year over year.

What’s the bottom line? While the Case-Shiller and FHFA reports are dated as they’re for April, appreciation was still extremely hot as of that time. In addition, though these reports do not fully take into account the rise in interest rates we’ve seen this year, they do include much of the increase. With appreciation still so strong through April, this is supportive of the belief that while we may see home price gains slow, we shouldn’t see decreases in pricing.

Final First Quarter GDP Reading Sparks More Recession Fears

The final reading for first quarter GDP came in at -1.6%, which was a decline from the -1.5% reported in the second reading. While the textbook definition of a recession is two consecutive quarters of negative GDP, the National Bureau of Economic Research (NBER), who ultimately calls when we are in a recession, has expanded its definition. However, it would be hard to ignore two consecutive quarters of negative GDP, so monitoring how GDP performs in the second quarter will be crucial.

Keeping an Eye on Jobless Claims

The number of people filing for unemployment benefits fell by 2,000 in the latest week, as 231,000 Initial Jobless Claims were reported. Continuing Claims, which measure people who continue to receive benefits after their initial claim is filed, decreased by 3,000 to 1.328 million, just above a 50-year low.

What’s the bottom line? While Initial Jobless Claims decreased in the latest week, the 4-week average is at the highest level since December, and it has been consistently moving higher. So even though Initial Jobless Claims remain low, there is a clear trajectory higher, which should continue given the announcements of significant layoffs from several public companies. Once some of these layoffs are reflected in these numbers, we should see this figure start to jump, leading to a higher unemployment rate.

What to Look for This Week

After the market closures Monday in honor of the Independence Day holiday, key reports from the labor sector will hit the headlines. On Thursday, the ADP Employment Report will give us an update on private payrolls for June, plus the latest Jobless Claims data will also be reported. Ending the week on Friday, the Bureau of Labor Statistics Jobs Report for June will be released, which includes Non-farm Payrolls and the Unemployment Rate.

Technical Picture

Mortgage Bonds moved higher last week, testing the ceiling at their 50-day Moving Average on Friday, but they were rejected from this level and ended the week trading between it and support at the 25-day Moving Average. The 10-Year has moved sharply lower and is trading in a wide range with support at its 100-day Moving Average and a ceiling at the 50-day Moving Average.

Information (weekly review) was provided by Mark Hedman
Homebridge Financial Services  - Sales Manager, Mortgage Loan Originator