The U.S. Labor Department released the September Consumer Price Index (CPI) report This Week in Real Estate with results exceeding expectations causing mortgage rates to surge to new 20-year highs. When it comes to the bond market, traders have long priced in everything that was already known and assumed about inflation, but this week’s CPI data came in higher than forecasted, garnering a significant response from the market. It is highly unlikely that rates would go substantially lower as long as inflation remains at current levels and conversely, if inflation continues surprising to the upside, rates are more likely to continue higher and volatility remains a risk. Below are a few newsworthy events from the second week of October that influence our business:
Here’s Just How Difficult It’s Getting for Home Buyers. The next several months will be a critical test for the economy, experts say. Consumers are facing economic pressure from every angle – rising mortgage rates, stubbornly high inflation, a battered stock market. Also at issue for consumers is the Federal Reserve’s tactics to tame inflation, says NAR Chief Economist Lawrence Yun. “Even with an economic recession looming, the Federal Reserve is unlikely to let up on its aggressive monetary policy of raising interest rates,” Yun says. “The 10-year Treasury yield broke past 4%, and mortgage rates will be fighting to hold at a 7% average in the upcoming weeks. The Fed’s goal is to cut consumer demand to reduce inflationary pressure, but Yun says increasing supply also will help inflation come down. “America has to produce more of everything, from building more homes and industrial spaces to drilling for more energy and manufacturing more electric cars,” he says. “The 3 million Americans who left the workforce since the pandemic need to be incentivized to get back to work.” “We continue to see a tale of two economies in the data: Strong job and wage growth are keeping consumers’ balance sheets positive while lingering inflation, recession fears and housing affordability are driving housing demand down precipitously,” says Sam Khater, Freddie Mac’s chief economist. “The next several months will undoubtedly be important for the economy and the housing market.”
Stunning Round Trip for Mortgage Rates After Inflation Data. There was no way to be sure what the effect of today’s economic data would be on mortgage rates. All we knew is that the Consumer Price Index (CPI) would be released at 8:30am ET and that CPI releases have been the biggest sources of volatility for interest rates in 2022 and especially since June. If you’re wondering what CPI has to do with mortgage rates, here’s a quick run-down: mortgage rates are based on trading levels in bonds, bonds care a lot about inflation and about Fed policy, Fed policy is more likely to be less friendly to rates if inflation is higher than expected, CPI is the biggest inflation revelation on any given month. After this morning’s CPI came in hotter than expected, mortgage rates surged to new 20-year highs. Today’s CPI data brought NEW information to light. If CPI had been right in line with the average economists forecast, it may not have garnered much of a response from the market. But it came in higher than forecasts, and that was a rude awakening for bonds.
Economy Expected to Contract Further in 2023, as the Fed Appears Resolved to Tame Inflation. The combination of high inflation, monetary policy tightening, and a slowing housing market is still projected to tip the economy into a modest recession in the first quarter of 2023, according to the October 2022 commentary from the Fannie Mae Economic and Strategic Research (ESR) Group. Core inflation remains considerably higher than the Federal Reserve’s stated target; and despite the historic decline in August job openings, the continued strength in labor has futures markets expecting the Federal Open Market Committee (FOMC) to raise the federal funds rate by an additional 75 basis points at its November meeting. Due largely to the higher mortgage rate environment, the ESR Group lowered its forecast for total single-family home sales in 2022 and 2023 to 5.64 million and 4.47 million, respectively, which would represent annual declines of 18.1 percent and 20.8 percent.
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