Weekend Talking Points - ‘Persistent’

Inflation continued to trend lower and retail sales were flat in May. Excluding the “blowout” May jobs number from the BLS, recent data releases have been noticeably softer. But the Fed doesn’t seem to notice, laser-focused on its 2% “core” PCE target. Will we get any rate cuts this year?

CPI lower than expected. The “headline” CPI (Consumer Price Index) was flat month-over-month in May. The “core” CPI grew only 0.2% MoM. Expectations were for +0.1% on the headline and +0.3% for the core. As a result, the year-over-year “core” figure fell from +3.6% in April to +3.4% in May, and the YoY “headline” figure dropped from +3.4% in April to +3.3% in May.

Retail sales were flattish. May retail sales were up just 0.1% month-over-month. Excluding autos, sales were down 0.1% MoM. Both figures were lower than expected. In addition, retail sales for April were revised down from flat to -0.2% MoM.

A more balanced market? Inventory is rising nationwide, and some metros have already shifted to a buyer’s market, according to Zillow, who forecasts a 1.4% drop in home values over the next 12 months. [Zillow]

Builder confidence falls again. After a big (6 point) drop in May, the National Association of Homebuilders’ confidence index fell an additional 2 points to 43 in June. That’s well below the 50 breakeven point between bullishness (expansion) and bearishness (contraction). Here’s what NAHB Chairman Carl Harris had to say:

“Persistently high mortgage rates are keeping many prospective buyers on the sidelines. Home builders are also dealing with higher rates for construction and development loans, chronic labor shortages, and a dearth of buildable lots.”

22.4 million “cost burdened” renters. Rental rate growth has far outstripped income growth over the last few years — particularly for lower-income households. That leaves very little money left over for everything else. [JCHS]

May housing starts missed. Housing Starts dropped 6% month-over-month in May to 1,277,000 units (SAAR), which was both below expectations and the lowest figure seen in 4 years. Building Permits for future construction also declined MoM, with permits for new multifamily units down 31% year-over-year. [Census Bureau]

Not as ‘Locked-In’ as You’d Imagine

According to 4Q 2023 data from the FHFA, more than three-quarters of outstanding mortgages had an interest rate below 5%, and nearly 60% had interest rates below 4%. With average 30-year mortgage rates currently around 7%, it should be clear that: 1) most mortgage holders wouldn’t willingly give up their very low rates, and 2) profitable (for the mortgage holder) refinancing opportunities are scarce.

And yet, we’ve got 35% more homes for sale than we did at the same time last year. And refinances made up 30–35% of total mortgage applications over the last few weeks. So in spite of the “lock-in” effect, people are still selling and refinancing. But why? Here are a few reasons:

• Life happens — You might NEED to move because of marriage, birth, divorce, death or a new job. You might not want to give up your low rate, but you still have to.
• Taking profits — If you bought a home in Miami in late 2020, the value has risen by something close to 75%. You’d be up at least 40% if you bought in most other metros. And you’ve already held the property for more than two years, so you’d only pay capital gains at the long-term rate.
• Downsizing — If you’ve got enough equity in your home, you might be able to sell it, pay off your existing mortgage, and buy an apartment somewhere cheaper all-cash or with a relatively small mortgage.
• Debt consolidation — If you’ve got a lot of higher interest rate debt (credit cards etc.), it might make financial sense to do a cash-out refi, and pay down your credit card balances. Even with a higher mortgage rate, you still might be able to reduce your monthly debt service costs!

Mortgage Market

After several weeks of high volatility, average 30-yr mortgage rates have settled down at around 7%. While that’s an improvement, it’s still high enough to have a very negative impact on transaction volumes for both existing (previously owned) and new homes — as recent pending sales and builder confidence figures attest to.

Current odds on Fed rate cuts at upcoming FOMC meetings below. Keep in mind that the US Presidential election is on November 5.

• July 31: 10% (was 9% last week)
• Sept 18: 64% (was 63% last week)
• Nov 7: 77% (was 77% last week)
• Dec 18: 94%

They Said It

“In 2022, the median residual income remaining after rent payment fell to a record low of just $310 each month for lower-income renters, far below the minimum needed to afford an adequate standard of living.” — Joint Center for Housing Studies of Harvard University.

“We are in an unusual situation because a lack of progress on reducing shelter inflation, which is currently running at a 5.4% year-over-year rate, is making it difficult for the Federal Reserve to achieve its target inflation rate of 2%. The best way to bring down shelter inflation and push the overall inflation rate down to the 2% range is to increase the nation’s housing supply. A more favorable interest rate environment for construction and development loans would help to achieve this aim.” — Robert Dietz, NAHB’s Chief Economist