Newsletter - 06/13/2022
Week of June 6, 2022 in Review
Consumer inflation reached a 41-year high in May while annual home price appreciation tied another record high in April. Here are the key headlines:
- Consumer Inflation Hits Highest Level Since 1981
- Majority of Top Economists Do Not Believe We’re in a Housing Bubble
- Annual Home Price Appreciation Ties Record High
- Does the Rise in Initial Jobless Claims Signal a Slowdown?
Consumer Inflation Hits Highest Level Since 1981
The Consumer Price Index (CPI), which measures inflation on the consumer level, rose 1% in May, which was much higher than the expected 0.7% gain. On an annual basis, CPI rose from 8.3% to 8.6%, which is the hottest reading in 41 years. Core CPI, which strips out volatile food and energy prices, rose by 0.6%, just above the 0.5% gain expected. Year over year, Core CPI decreased from 6.2% to 6%.
Of note within the report, food costs climbed another 1.2% in May, bringing the year-over-year gain to 10.1%. Rents rose 0.6% last month and are now up 5.2% year over year. Fuel also increased 16.9% in May and is now up almost 107% from this time last year. On average across the country, gas prices are over $5 a gallon, which is the highest ever.
What’s the bottom line? Not only does inflation lead to higher costs of goods, but it is also the arch enemy of fixed investments like Mortgage Bonds because it erodes the buying power of a Bond’s fixed rate of return. If inflation is rising, investors demand a rate of return to combat the faster pace of erosion due to inflation, causing interest rates to rise as we’ve seen this year.
Remember that the main tool the Fed uses to curb inflation is hiking its benchmark Fed Funds Rate, which is the interest rate for overnight borrowing for banks. So counterintuitively, when the Fed hikes its benchmark Fed Funds Rate, this can be good for interest rates because it curbs inflation. The Fed is expected to hike its benchmark Fed Funds Rate by 50 basis points at its meeting this week, and investors will be closely watching what actions they take and comments they make regarding inflation.
Majority of Top Economists Do Not Believe We’re in a Housing Bubble
Zillow and Pulsenomics released their Home Price Expectations Survey for the second quarter. Released each quarter, the survey asks a distinguished panel of over 100 economists, investment strategists and housing market analysts about their 5-year expectations for future home prices in the United States.
What’s the bottom line? Respondents were also asked, “Do you believe the U.S. housing market is currently in a bubble?” Of the 98 respondents with an opinion on the question, 65% answered “No.” Some of the reasons provided for this belief included continued low housing inventory, recent price growth caused by fundamentals like demographics and shifting housing preferences, rising rents, the work-from-home revolution and high homeowner equity. So, while it may not be easy to buy a home right now, it should still be a smart financial decision.
Annual Home Price Appreciation Ties Record High
CoreLogic released their Home Price Index report for April, showing that home prices rose by 2.6% from March and 20.9% on a year over year basis. This annual reading remained stable from March and matches the highest reading in the 45-year history of the index. In addition, CoreLogic estimated that 70% of homes sold above asking price this spring.
What’s the bottom line? CoreLogic forecasts that home prices will appreciate 1.2% in May and 5.6% in the year going forward. This level of appreciation is extremely meaningful for wealth creation. For example, if someone bought a $400,000 home and put 10% down, that means they would gain $20,000 in appreciation over the next year and earn a 50% return on their investment due to leverage.
Does the Rise in Initial Jobless Claims Signal a Slowdown?
Initial Jobless Claims rose by 27,000 in the latest week, as 229,000 people filed for unemployment benefits for the first time. Continuing Claims remained unchanged at 1.306 million – the lowest number in more than 50 years.
What’s the bottom line? While Initial Jobless Claims decreased in the latest week, the 4-week average is at the highest level since mid-February. This could be an early sign that companies are starting to not only pause hiring but are also beginning to lay people off due to slowdowns. It’s crucial to monitor this report and see if Initial Jobless Claims continue to rise.
What to Look for This Week
More inflation and housing data are ahead, beginning Tuesday when the Producer Price Index for May will give us an update on wholesale inflation. On Wednesday, June’s National Association of Home Builders Housing Market Index provides a near real-time read on builder confidence while Thursday brings Housing Starts and Building Permits for May.
But perhaps the biggest news will be the Fed’s two-day meeting beginning Tuesday, with the Monetary Policy Statement and press conference coming on Wednesday. Again, investors will be closely watching their actions and commentary regarding inflation.
Mortgage Bonds ended the week much lower, breaking beneath support at 100.531 after a hotter than expected CPI report on Friday. There is a lot more room to the downside now that this important floor has been broken. Looking at the 10-year, yields are currently at around 3.15%, with no real ceiling or resistance levels to stop them before reaching the next ceiling at 3.25%. If that level does not hold, we could see yields move as high as 3.50%.
Weekly Review by Mark Hedman
Homebridge Financial Services - Sales Manager, Mortgage Loan Originator