Drifting In The Right Direction
July 19, 2024 -- While not exactly imperceptible, mortgage and other interest rates have stepped downward a bit in recent weeks, with the average rate for 30-year fixed-rate mortgages touching a five-month low this week. Before you get too excited about this happenstance, its worth considering that these rates are still well into the upper 6% range and aren't even yet in danger of reaching the 2024 lows we saw back in mid-January. Still, any downward moves for rates are welcome, even small ones, even if they only change the housing picture to a modest degree.
Although there is a Fed policy-setting meeting coming up at the end of the month, financial markets currently expect that the Fed will give this one a skip, but are likely to start the next rate-cutting cycle at its mid-September get-together. Of course, there is no "official" timing set for the first decrease in rates, and Fed Chair Powell noted at a conference this week that "I'm not going to be sending any signals one way or another on any particular meeting... [the FOMC] is going to make these decisions meeting by meeting."
Economic and inflation data over the last month or two have pointed to moderating conditions, but the Fed wants to see a greater accumulation of favorable news before it makes a policy change. Two more pieces will come next week, including the initial reading on GDP for the second quarter of 2024 and June Personal Consumption Expenditure (PCE) price data. The Fed prefers to use a core PCE price measure as its inflation barometer, targeting a 2% annual core PCE rate. Annual Core PCE ran at a 2.6% clip through May.
If the GDPNow model from the Federal Reserve Bank of Atlanta is correct, annualized GDP growth for the second quarter may come in at a 2.7% rate, at least according to the data accumulated through July 17. That said, this running estimate has overshot the mark before, and as recently as just a few months ago. Just prior to the initial first quarter GDP report, this model suggested a 2.9% rate for GDP, but the official release revealed a 1.6% rate (subsequently revised down to a 1.4% pace). As such, we'll need to wait to see what the actual first estimate for GDP shows, but something around the 2% level seems about right to us.
Such a growth rate would be more consistent with the anecdotal information presented in the Fed's Regional Survey of Economic Conditions, also known as the "Beige Book" for the color of its cover. The latest report covered the six weeks leading up to July 10, with the summary noted that there was a "slight to modest pace of growth in a majority of Districts," However, just seven of the twelve districts "reported some level of increase in activity" while "five noted flat or declining activity - three more than in the prior reporting period." As such, there was most definitely a softening of economic activity at the end of the second quarter. Other highlights noted that "employment rose at a slight pace overall", something we already knew from recent labor reports, while inflation "increased at a modest pace overall, with a couple districts noting only slight increases" in price pressures.
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The index of Leading Economic Indicators from the Conference Board doesn't point to much by way of robust economic activity, either. The LEI managed just one foray to a value as high a zero this past February after a 22-month string of negatives, and has since turned negative again. The latest -0.2% value for June was an improvement of sorts, at least compared to the 0.4% decline for May, but there's little in the recent LEI trend to suggest that there was any kind of ramp-up in growth during the second quarter or much forward momentum as we begin to move deeper into the third.
Retail sales were flat in June, falling back from an upwardly-revised 0.3% gain in May. The top-line sales number was dragged down by lower gasoline costs and auto sales, with the former caused by lower prices and the latter by a software hack that disrupted sales of new vehicles last month. Outside of these, the so-called "core" rate of retail sales managed a fine 0.9% increase. Recently, there has been a growing chorus of consumer-facing companies reporting that consumers are pulling back on spending, selecting lower-cost choices such as store brands or focusing only on purchases of essentials. Retail sales figures are expressed as percentage changes in the amount of dollars spent and are adjusted for seasonality but not for changes in prices. As such, consumers purchasing lower-cost product B over higher-cost product A would tend damp sales figures even if the consumer ends up with a functionally-equivalent item.
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With the spring housing season coming to a close, homebuilder moods continue to also be damped. The National Association of Home Builders Housing Market Index retreated by another point in July, edging down to 42. Current single-family sales also took one step back, moving to 47 this month from 48 in June, while hopes for conditions over the next six months reversed that, moving one tick higher to 48 in July after standing at 47 in June. Homebuyer traffic at model homes and sales offices continues to be meager, with a one-point drop settling this measure back to 27. The HMI uses a par value of 50 to indicate neutral conditions, with values above it suggesting growth. Current levels are pretty soft, and are akin to those seen back in December, when mortgage rates were just starting their retreat from 23-year highs.
Builders have the blues even as construction activity picked up a little last month. Housing starts in June managed a 3% increase to a 1.353 million (annual) rate of construction initiation, all due to a pickup in activity in multifamily construction, which posted about a 20% increase to a 360,000 annual rate. Conversely, single-family starts fell back 2.2% and landed at a 980,000 rate, roughly an eight-month low. Looking forward, permits for future building told much the same story; overall permits rose by 13.4% to a 1.448 million annual pace, but those for single-family homes dropped 2.3% to a 934,000 rate, meaning all the gain was from the multi-unit side of the market,
Like many other costs, import and export prices had a pretty firm period to start the year but appear to be fading again. Costs for imported items were unchanged in June after May's decline of 0.2%; that said, lagged effects from prior increases helped lift the annual rate for import price inflation to 1.6%, steadily edging higher after hitting a -2.4% nadir in December. Still, a 1.6% clip for import costs is quite mild and not a concern, especially if the near-term data are again turning more favorable. Costs of exported goods and services have largely followed the same pattern, if perhaps more so, as export costs declined by 0.5% last month after a 0.7% drop in May. Over the last year, export prices have managed just a 0.7% increase, although they have powered up from a -5.1% annual rate just last November.
Manufacturing has been burbling along at a sub-par pace overall for a while now, with the ISM manufacturing index only hitting a level above breakeven once since October 2022, and even then just barely. That said, this doesn't mean there cannot be some bright spots or regions where activity is doing pretty well; this seemed to be the case for July, at least so far, as regional manufacturing activity reports from the Federal Reserve Banks of New York and Philadelphia moved in opposite directions this month. The FRB/NY's local report posted a headline value of -6 for July, an improvement of sorts from the -6.6 seen last month. Details weren't all that favorable, with the measure of new orders "improving" from -1 to -0.6 this month and employment edging up 0.8 points to -7.9 for July. Prices paid by factories in this region firmed a bit, sporting a 2 point increase to 26.5 to start the third quarter. All in all, activity here is still pretty soft.
But that wasn't the case just a little further down the eastern seaboard, The FRB/Philadelphia's similar gauge rebounded smartly in July, powering 12.6 points higher to a fair 13.9 for the month, with this figure now part of a six-month string of increases. New orders bounded higher, with a 22.9-point leap to 20.7, its loftiest level in more than two years. The employment measure kicked higher by 17.7 points, moving from a negative in June to a +15.2 for July, and prices paid settled back 2.7 points to a mellower 19.8 for the month. Manufacturing is on pretty solid footing in the Philadelphia Fed's district.
Driven higher by hot weather, Industrial Production rose by 0.6% in June. A 2.8% increase in utility output helped press the overall figure higher last month, but it wasn't alone. Despite mix-and-match reports of activity, manufacturing output managed to rise by 0.4% and was joined by a 0.3% increase in production from mining last month, too. Manufacturing has seen positive output in four of the last five months; utility production was strong across the entirety of the second quarter. Otherwise, mining activity has been in a back and forth pattern since the year began. With June's increase, the percentage of industrial production floors in active use rose to 78.8%, its highest level since last September, if still at a level well below that which might contribute to inflationary pressures.
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Initial claims for unemployment benefits popped higher by 20,000 in the week ending July 13, rebounding after the holiday-distorted period the week prior. Averaging out the two weeks puts the figure at 233,000, about where initial claims have been over the last six weeks or so. Although still historically low, this is a more elevated level than was seen during the late winter and early spring, and suggests that the loosening in labor markets continues at a gradual pace. The Fed no longer thinks that the labor market is a source of significant inflationary pressure, and that the imbalance between open jobs and available workers is nearly back to pre-pandemic levels.
Applications for mortgage credit have a long way to go to get back to prepandemic levels, but it might be a long time as well until we see the kind of mortgage rates that support that level of activity. Currently, even small dips in interest rates are enough to help at least a few more folks jump into the market, and the Mortgage Bankers Association reported that there was a 3.9% increase in requests for mortgage loans in the week ending July 12. Purchase-money requests shrank by 3.3%, so all the gains came from a 15% increase in applications to refinance existing mortgages. This activity is largely coming from the government-backed side of the market, and likely from fairly recent originations, too. The FHA and VA both support streamline refinance programs that can provide value to a homeowner even if a break in rate is small.
Current Adjustable Rate Mortgage (ARM) Indexes
| Index | For The Week Ending | Year Ago | |
|---|---|---|---|
| Jul 12 | Jun 14 | Jul 14 | |
| 6-Mo. TCM | 5.30% | 5.38% | 5.53% |
| 1-Yr. TCM | 4.96% | 5.12% | 5.36% |
| 3-Yr. TCM | 4.33% | 4.50% | 4.40% |
| 10-Yr. TCM | 4.25% | 4.32% | 3.89% |
| Federal Cost of Funds |
3.956% | 3.927% | 3.460% |
| 30-day SOFR (daily value) | 5.33808% | 5.33303% | 5.06660% |
| Moving Treasury Average (MTA/12-MAT) |
5.163% | 5.173% | 4.430% |
| Freddie Mac 30-yr FRM |
6.89% | 6.87% | 6.78% |
| Historical ARM Index Data | |||
Both the economy and inflation appear to be in a gentle drifting pattern at the moment, and labor markets are slackening as we go along. If things work out well, by September the Fed should be starting to trim rates at a time when easing off the brakes a bit should both help support economic activity a little while still attenuating inflation. At least right now, there doesn't appear to be a great likelihood of a sudden acceleration in the economy, and if supply chains are mostly healed (excepting issues in global shipping at the moment) and the labor market is back to reasonable balance, the chances that the will be a sustained uptrend in inflation is diminished, too.
This isn't to suggest that it's all smooth seas and clear sailing ahead; fortune rarely allows for such things. It also doesn't mean that there's a straight downward trend for interest rates either. It does mean that there is at least a growing chance that lower rates from both the Fed and in the markets may be on their way before long, provided that inflation and the economy can continue to drift in the right direction for a time longer yet.
The yields and bonds that most influence mortgage rates have declined a fair bit in recent weeks, but this rally seems to have flattened and even reversed a bit in recent days, halting the decline in mortgage rates. The second quarter GDP report isn't out until Thursday and the important PCE report isn't due until Friday, leaving investors little to chew on until then. Since both those market-moving reports come after the next report on rates from Freddie Mac, we think there's a good chance that the average offered rate for a conforming 30-year fixed-rate mortgage will be largely stable, with perhaps a move of a couple of basis points in either direction when Freddie's next report comes out.
What's the outlook for mortgage rates for the summer of 2024? See what we think will happen to them in our latest Two-Month Forecast for mortgage rates, covering mid-June though mid-August.
To start each year, we release our Annual Mortgage and Housing Market Outlook. In it, we take a forward look at a range of topics, including mortgage rates, Fed policy, home sales, home prices and lots more. We just did our mid-year review to see how well market conditions are meeting our expectations. Have a look and see how we're doing!
For a really long-run outlook, you'll want to check out "Federal Reserve Policy and Mortgage Rate Cycles".
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