Weekend Talking Points - 'Low Sixes'

The big story this week is 30-yr mortgage rates, which are already in the low sixes as the market anticipates multiple Fed rate cuts (and perhaps a recession) ahead. It may be the slow season, but you should be working your contact list like crazy right now.

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August BLS jobs report came in low. The US added 142K jobs in August, below expectations of 165K, and the previous months’ figures were revised downward by 86K in total. [Bureau of Labor Statistics]

TP: The July BLS report changed everything — just 114K jobs growth and the unemployment rate jumped from 4.1% → 4.3%. At that time, there was a lot of chatter that this might have been a fluke. Instead, that original 114K figure was revised down to 89K and the new August data also came in weaker than expected.

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No demand recovery just yet. MBS Highway’s National Housing Index dropped 2 points in September to 40. This was the fifth straight month-over-month decrease. So far, the sharp drop in mortgage rates over the last four months has yet to overcome the seasonal slowdown. Activity levels were highest in the Northeast and Mid-Atlantic and lowest in the Southeast and Southwest.

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Unless you’re talking about refis. According to the Mortgage Bankers Association, refi volumes are up 106% year-over-year and refi applications are currently making up 47% of total application volume. [MBA]

TP: With average mortgage rates down nearly 200 bps from their October 2023 peak, we’re already seeing a big recovery in refinancings. It’s only a matter of time before we see existing home sales pick up. But…it is the slow season, so you can’t expect a massive spike.

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Buyers are still bearish, but increasingly hopeful. Fannie Mae’s Home Purchase Sentiment index rose slightly to 72.1 in August (that’s still very low) with 83% of respondents saying it was a “Bad Time to Buy.” That said, respondents were more optimistic about lower mortgage rates (and perhaps even home prices) ahead. [Fannie Mae]

TP: You’ve got to be careful with this one. Right through the pandemic, 60–80% of consumers were saying it was a “Bad Time to Buy.” In retrospect, it was a GREAT time to buy.

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September 29 — Oct 5. That’s the best week to buy a home, according to Realtor.com. Why? Because historically that’s when buyers see the best combination of rising inventory of homes for sale AND declining competition levels. In other words, when buyers have more bargaining power. [Realtor.com]

CPI: Two ways to look at it. “Headline” CPI dropped from +2.9% YoY to +2.5% YoY in August as energy prices fell. But “core” CPI was flat at 3.2% YoY as housing costs rose. Good news for you and me. OK news for the Fed. [Bureau of Labor Statistics]

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TP: Consumers care about the “headline” inflation (Lower gas and food prices? Yes, please!) but the Fed cares more about “core.” As a result, it feels as if that flat “core” CPI reading has pretty much ruled out a 50 basis first cut on September 18.

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Home price growth decelerating. National home prices were flat month-over-month in July, but still up 4.3% year-over-year as affordability issues (and the normal seasonal slowdown) continued to suppress demand. [CoreLogic]

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August’s “hottest” housing markets. For what feels like forever, Manchester-Nashua NH was the hottest city (lots of online listing views + fast sales pace) and cities in the Northeast and Midwest took all 20 of the top spots. [Realtor.com]

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Is CoreLogic being CoreLogical?

Each month, the data giant makes forecasts for home price growth over the next month and the next 12 months. This is not an easy task. I’m glad I’m not doing it. If you look at the graph below, you’ll see that CoreLogic tends to underestimate monthly price growth in the first half of the year and then overestimate it in the second half of the year.

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Things get even worse when they look 12 months out. Throughout 2022 and 2023, CoreLogic has consistently underestimated home price growth over the next 12 months. For example, in January 2023, they forecasted 3.0% home price growth over the next 12 months, but the actual price growth was 6.1%!

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So where will the red (actual) line go from here? Look, there is no doubt that home price growth is decelerating. But I still feel like CoreLogic’s current forecast for 2.2% home price growth over the next 12 months (July 2024 to July 2025) is far too low when you consider that: 1) mortgage rates are down 2% in the last four months, 2) inventory is still 28% below pre-pandemic levels, and 3) that after two years of 4 million units of existing home sales, we’re overdue a rebound.

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“Housing demand continued to buckle under the pressure of high mortgage rates and unaffordable home prices, leading to a considerable slowing of home price gains during the summer. July’s prices were essentially flat from the month before, which was notably cooler than the average gain of 0.4% recorded between June and July in years prior to the pandemic and especially during the pandemic.

The question for home prices going forward is whether the upcoming rate cut from the Fed and the expected continuation of falling mortgage rates will be sufficient to motivate potential homebuyers who may start to fear a cooling labor market and continued uncertainty of a soft landing, along with anticipation around the presidential election. And while lower mortgage rates are a boost to affordability, and are likely to help buyer demand, the usual fall housing market slowdown is upon us and is likely to contain any significant surge in activity.” — Dr. Selma Hepp, CoreLogic’s Chief Economist

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Mortgage Market

The message from “jobs week” turned out to be very consistent:

• JOLTS: Job openings much lower than expected
• Beige Book: 9 out of 12 regions surveyed showed “flat or declining activity” (up from 5 in the previous report)
• Challenger: Announced layoffs spike; weakest hiring plans since 2005
• ADP: Lowest job gains since January 2021
• BLS: Only 142K jobs added in August and previous months revised down by 86K

It was the BLS jobs report last Friday that really propelled treasury yields and mortgage rates lower this week. Average 30-year mortgage rates moved down to 6.11% on Wednesday, nearly 200 basis points (2.0%) below the October 2023 peak. However, the CPI report was a bit of a disappointment in that it seemed to take a 50 basis points cut off the table.

Here are the current odds on Fed rate cuts at upcoming FOMC meetings:

• Sept 18: 100% (same as last week); the probability of a 50 basis points cut at 15% (way down from 39% last week).
• Nov 5: US presidential election.
• Nov 7: 100% (same as last week); 46% probability that rates will be 75 basis points lower than current (that’s down from 49% last week)
• Dec 18: 100% (same as last week); 48% probability that rates will be 100 basis points lower than current (that’s about the same as last week).
  

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