Inflation Slowed From 9.1% in June, To 8.5% in July

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The Mortgage Bankers Association reported This Week in Real Estate that the delinquency rate for mortgage loans on one-to-four-unit residential properties decreased 47 basis points at the end of the second quarter from the first quarter and down 183 basis points from one year ago. At 3.64 percent, the mortgage delinquency rate in the second quarter fell to its lowest level since the MBA began tracking the data in 1979. Inflation slowed from 9.1% in June to 8.5% in July, which, according to National Association of Realtors chief economist Lawrence Yun, “could bode well for the housing market in the months ahead.” Below are a few newsworthy events from the second week of August that influence our business: 

Yun: Slowing Inflation Suggests Mortgage Rates Have Topped Out. Inflation eased slightly in July, which could bode well for the housing market in the months ahead, says Lawrence Yun, chief economist for the National Association of Realtors. Overall, inflation slowed from 9.1% in June to 8.5% in July. Still, the slight deceleration suggests that consumer price inflation may have peaked, which suggests that mortgage rates also may have peaked, Yun says. The level of inflation “is still high and uncomfortable but may indicate the start of a steady retreat,” Yun adds. But could the worst of sky-high inflation be behind Americans? Yun thinks so. “If there is a sustained decline in gasoline prices and more production of apartments and single-family homes, consumer prices will pull back, encouraging the Federal Reserve policy to be less aggressive,” Yun says. “Mortgage rates will fall.” On Wednesday morning, the 10-year Treasury yield stood at 2.7%. “That should translate into 30-year mortgage rates pulling back to under 5%,” Yun says. “Some recent potential home buyers who were pushed out of the market may now be able to get back in and qualify for a mortgage.”

U.S. Mortgage Delinquencies Dip in Second Quarter of 2022. According to the Mortgage Bankers Association’s latest National Delinquency Survey, delinquency rates for mortgage loans on one-to-four-unit residential properties decreased to a seasonally adjusted rate of 3.64 percent of all loans outstanding at the end of the second quarter of 2022. The delinquency rate was down 47 basis points from the first quarter of 2022 and down 183 basis points from one year ago. “At 3.64 percent, the mortgage delinquency rate in the second quarter fell to its lowest level since MBA’s survey began in 1979 – even beating out the previous pre-pandemic, survey low of 3.77 percent in the fourth quarter of 2019,” said Marina Walsh, MBA’s Vice President of Industry Analysis. According to Walsh, of all the economic indicators that can lead to mortgage delinquencies, the U.S. unemployment rate seems to be the best gauge of loan performance. Despite inflationary pressures, stock market volatility, increases in mortgage rates, and two quarters of economic contraction – often defined as a recession – the job market remains incredibly strong. The unemployment rate was 3.5 percent in July – a half-century low that tracks closely with the record-low mortgage delinquency rate. Added Walsh, “Foreclosure inventory levels and foreclosure starts remain well below historical averages for the survey – a strong indication that servicers are able to help delinquent borrowers find alternatives to foreclosure. Such alternatives include curing, loan workouts, home sales – with possible equity to spare, or cash-for-keys and deed-in-lieu options.”

Is Housing Inventory Growth Really Slowing Down? One of the most important housing market stories in recent weeks has been the decline in new listings, which has slowed the growth rate of total inventory. What does this mean? Some have said this is evidence of a soft landing for housing since we are in August and it doesn’t look like we are going to even get to the peak inventory levels we saw in 2019 this year, or even breach the lower levels of 2019 on the national data. Clearly, we are seeing a slowdown in new listings as the data has been negative now for weeks. One thing that I have stressed is that higher mortgage rates can create a slowdown in demand and thus allow more inventory to accumulate through a weakness in demand. After March of this year when rates were rising, this was the case, especially when rates ranged between 5% to 6%. Inventory growth is happening much like we saw in 2014 – the last time total inventory grew – which was also the last time mortgage purchase application data went negative year over year. The problem with new listings declining now is what will happen if mortgage rates make a solid push lower. At that point housing inventory could slow even more, pause, and in some cases fall again due to demand. If mortgage rates peaked at 6.25% or 6.50%, that means that the next big move should be lower and that is a risk to getting balance back into the system. All in all, the decline in new listings does warrant a conversation on how much more growth we will see for the rest of the year. Inventory data is very seasonal and traditionally we see inventory start to fall in October as people start getting ready for the holidays and the New Year, and then in the spring and summer inventory pops up again. I would remind everyone that the growth rate of inventory, working from all-time lows, was aggressive in the last few months, so some context is needed if we do see some weekly declines in inventory during the summer months. For now, this is due to a lack of new sellers rather than demand picking up. If demand starts to pick up due to falling rates, that is an entirely different conversation we will have, but we haven’t crossed that bridge yet.

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