Newsletter - 05/31/2022
Week of May 23, 2022 in Review
Headlines showed that April brought moderating inflation and slower home sales, but that’s not the whole story. Low inventory and completion delays continued to impede home sales, and more signs of an economic slowdown are on the horizon.
Inflation Moderates in April, But Don’t Be Fooled
The Fed’s favorite measure of inflation, Personal Consumption Expenditures (PCE), showed that headline inflation rose 0.2% in April, cooler than estimates of 0.3%. This caused the year over year reading to decrease from 6.6% to 6.3%. Core PCE, which strips out volatile food and energy prices and is the Fed’s real focus, met estimates with a 0.3% rise. Year over year, Core PCE decreased from 5.2% to 4.9%.
What’s the bottom line? While the PCE report showed that inflation moderated in April, we can’t be fooled by peak inflation just yet. It’s too early to call if inflation has truly peaked because China will be letting up on their lockdowns soon, which should cause more energy consumption.
In addition, it’s important to note that annual inflation is calculated on a rolling 12-month basis.
Low Inventory Continues to Impede Pending Home Sales
Pending Home Sales, which measure signed contracts on existing homes, fell 3.9% in April, coming in weaker than the 2% decline that was expected. Sales were also down 9.1% year over year. There is no doubt that higher interest rates are impacting demand, but demand is still hanging in there considering the increase in prices and lack of inventory.
What’s the bottom line? The last reading on existing home inventory showed that there were 1.03 million homes for sale, yet there were only 409,000 active listings, meaning only 40% of the homes counted as inventory were actually available for sale. Why the disparity? Existing inventory also includes homes under contract that have not yet been sold. This data speaks to the ongoing imbalance in actual supply versus demand.
Completion Delays Hinder New Home Sales
New Home Sales, which measure signed contracts on new homes, were down 17% from March to April to a 591,000-unit annualized pace. While this was in line with expectations, the report was weaker than it appears because of a negative revision to March’s data. When factoring that in, sales were down 22% from the initially reported number. Year over year, sales fell nearly 27%.
The median home price came in at $450,600, up 20% year over year and points to an increase in higher-priced homes sold.
What’s the bottom line? While higher rates and home prices impact new home sales, uncertainty is as well. It usually takes six months to build a new home, but it’s much longer today, and there is little certainty on completion times. People rarely make moving plans years in advance, and with rates moving higher and fears of a recession, many are not comfortable purchasing a new home that is not completed and does not have a solid finish date.
And to that point, while there were 444,000 homes for sale at the end of April, only 38,000 or 6%, were completed. The rest were either not started or under construction.
Why Monitoring Jobless Claims Remains Crucial
Initial Jobless Claims decreased by 8,000 in the latest week, as 210,000 people filed for unemployment benefits for the first time. Continuing Claims, which measure people who continue to receive benefits after their initial claim is filed, increased 31,000 to 1.346 million. This is coming off the lowest number of Continuing Claims since December 1969.
What’s the bottom line? While Initial Jobless Claims decreased slightly in the latest week, the 4-week average is at the highest level since February. Should the upward trajectory continue, it could be an early sign that unemployment will begin to rise, which is another recession indicator.
More Signs of Economic Slowdown
The manufacturing sector is showing signs of a slowdown, both globally and here at home. After weak readings from the Empire State Index (which measures manufacturing in the New York region) and the Philadelphia Fed Index, the Richmond Fed manufacturing index was also significantly lower than expectations.
In addition, the second reading on first-quarter GDP came in at -1.5%, which was a decline from the -1.4% we saw in the initial reading. It will be important to see how second quarter GDP performs, as a textbook definition of a recession is two consecutive quarters of negative GDP.
What’s the bottom line? The Fed has been hiking its benchmark Fed Funds Rate to curb inflation, with more hikes expected at their June and July meetings. However, there has been speculation regarding whether the Fed will have the resolve to keep hiking with deteriorating economic conditions.
What to Look for This Week
After the market closures Monday in honor of the Memorial Day holiday, home price appreciation data for March kicks off the week when the Case-Shiller Home Price Index and the Federal Housing Finance Agency (FHFA) House Price Index are released on Tuesday.
After being rejected from the ceiling at the 50-day Moving Average, Mortgage Bonds ended last week trading in a wide range between that ceiling and support at the 101.656 level. The 10-Year also tested its 50-day Moving Average but bounced higher and is currently trading at around 2.74%.
Weekly Review by Mark Hedman
Homebridge Financial Services - Sales Manager, Mortgage Loan Originator