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It was a mixed bag for home affordability in early 2024. See the income you need to buy a median-priced home in the top 50 metro areas for details.

It was a mixed bag for home affordability in early 2024. See the income you need to buy a median-priced home in the top 50 metro areas for details.

Better Mixed Than Not

May 17, 2024 -- After less-than-stellar inflation reports in the first three months of the year, investors have been a little on edge, watching their rate-cut hopes diminish with each passing month. The likelihood of a cut in rates by the Fed next month is just above zero and odds aren't very good for one to come in July, either. If lower monetary policy rates are to remain on the visible horizon, some better news regarding inflation needs to start to be seen, and soon.

New price data covering April started becoming available this week, but after the Producer Price Index kicked off the spate of new information, a feeling of "here we go again" seemed most appropriate. The PPI for April came in with a 0.5% increase, a couple of tenths of a percentage point higher than expectations, lifting the annual rate of price increases at levels above the consumer to 2.2%. This was the highest level in a year, and part of a rising pattern from last November's 0.8% nadir. Core goods prices rose by 0.3%, up from March, and are trundling along at 1.6% annual clip, little changed over the last four months. Service costs rose smartly, though, increasing by 0.6% last month, with the annual rate of pumped up to 2.7%, back to a level last seen in August of last year. Clearly, the PPI data were discouraging, creating a little additional trepidation about the update on consumer prices to come.

But the story regarding consumer prices was... somewhat better. The Consumer Price Index for April came in with just a 0.3% increase, declining slightly after back-to-back 0.4% figures. A fair bit of the lift in the headline value was due to higher energy costs again, but even so, the annual rate of CPI managed to slip back by a tenth of a percentage point to 3.4%, taking back a little of last month's increase. Core CPI (a measure that excludes highly-volatile food and energy costs) also came in with a monthly increase of 0.3%, breaking a three-month-string of 0.4% readings and helping the annual rate for core CPI to settle to 3.6%, its best showing in three years, Core goods prices eased by 0.1% and are actually declining by a 1.3% rate over the past year, but core service costs posted a 0.4% monthly increase and are still running at a 5.3% annual pace.

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While the implications for monetary policy are slight at best; the Fed will want to see several months of softer price pressures before again leaning toward cutting rates. However, that consumer inflation didn't worsen last month provided a bit of relief to investors, and the yield on the influential 10-year Treasury retreated to about four or five week lows. This should help mortgage rate continue their decline from 2024 highs reached just a couple of weeks ago.

In April, prices of imported goods continued their shift from decreasing to increasing. Import costs posted a 0.9% increase for April, the largest monthly bump since March 2022. While this only lifted the annual rate of import price increases to 1.1%, this is still part of a marked turnaround from an annual decline in import costs of 2.4% seen as recently as December. The U.S. also exported a little more price inflation in April, too, as costs of goods and services headed elsewhere increased by 0.5%. Like import prices, export costs are in an upward trend, although the latest increase here still leaves export costs 1% lower than a year ago. As recently as November they were declining at a 5.1% clip, so costs of goods both coming and going are heading higher, even if they aren't at a worrisome place as yet.

In looking at an accumulating pile of data suggesting that the economy is slowing, we pondered in last week's MarketTrends: "Is a softer tenor for the economy the precursor to getting inflation moving in the right direction again?"

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Another bit of evidence that economic growth has softened was seen this week in the Retail Sales report for April. Forecasts pointed to a likely 0.4% increase in spending last month, so the 0.0% figure for April was rather below estimates. There was also a downward revision to the March figure, which was trimmed from 0.7% to 0.6%. so retail sales in the end of the first quarter were also not as strong as initially reported. Sales were soggy in a number of categories, with the headline number only lifted to unchanged due to a 3.1% increase in sales at gasoline stations, a 1.5% gain in sales of electronics and appliances and a 1.5% lift in clothing and accessories.

Consumers may not actually be retrenching, and the soft sales figure to start the second quarter may only be a blip or stall. Retail sales figures are adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, so getting to "unchanged" may mean fewer unit sales at higher costs or higher unit sales at lower costs. The former would point to fewer purchases and a consumer pulling back; the latter, the opposite; it's just difficult to know which is which. With goods prices down compared to both a month ago and a year ago, it seems more likely that the healthier "more units, lower prices" is the current case, if only mildly so.

We're a couple of weeks away from a broad review of manufacturing conditions, but there are a couple regional observations of what's happening in factories to provide some fresh clarity in this sector of the economy. A regional barometer covering firms in the Federal Reserve Bank of New York's territory remained underwater for a sixth consecutive month, posting a reading of -15.6 for May, a 1.3-point fall. It is now the longest consecutive declining string for this index since 2015-2016. That said, there have only been nine positive monthly reading for this index since the start of 2022, so negative readings have been pretty common here, strung together or not. Within the report, a measure covering inbound new orders was nearly as soft in May as in April, sporting a -16.5 value for the month, down just 0.3 from March. Employment also remained underwater, with the -6.1 mark down a smidge but about the average level seen over the last three months, give or take a little. As far as inflation concerns, the "prices paid" measure did improve a bit, as a 5.4-point fall in this gauge left it at 28.3 for May.

Just down the Atlantic seaboard, conditions in the district served by the Federal Reserve Bank of Philadelphia were considerably better. Unlike New York, the local manufacturing gauge for this area has been in a positive streak for the last four months, although there was only a modest overall gain for May. The report's headline 4.5 value was a drop of 11 points from April; new orders turned from soundly positive in April to rather negative for May, tumbling 20.1 points to land at -7.9 for the month. Employment conditions were modestly less unfavorable this month, with a 2.8 point gain still leaving this component at -7.9. The prices paid inflation measure retreated a bit, easing 4.3 points to 18.7 for May and about in the middle of a six-month range.

Industrial Production didn't change at all in April, with the figure coming in below forecasts, and March's initial report saw a downward revision to just a 0.1% increase in output. For April, manufacturing production declined by 0.3%, erasing a portion of March's gain; mining production skidded for a second month in a row, posting a 0.6% decline in output, but utility production helped prop up the top-line number, rising by 2.8% in the first month of the second quarter. With not much by way of change over the last couple of months, the percent of industrial production floors in active use edged lower, falling a tenth of a percentage point to 78.4% for April. This is a level well below that which might create production bottlenecks that can contribute to inflation.

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The run-up in mortgage rates that started in April gave home builders the blues in May. The National Association of Home Builders Housing Market Index dropped by six points for May, falling from a just-above-par reading of 51 to a rather below par mark of 45 for the month. The current measure of single-family sales did manage to stay on the positive side of the ledger, but also suffered a six-point slide to land at 51 for the month. Expectations for sales conditions over the next six months were dented, too, posting a nine-point decline from a robust 60 to a weak 51, and the measure of potential buyer traffic at sales offices and model homes shed four points to a pretty soft reading of 30, not that it has been any higher than 34 since last August. Next week will bring the April report covering sales of new homes, and based on the NAHB member outlooks and observations, it will likely be at best unchanged from March's (yet to be revised) 697,000 annual pace.

That's not to say builders aren't working, though. Housing starts expanded by 5.7% in April, climbing to a 1.360 million (annualized) pace of construction initiation. Single-family starts eased just slightly, with a 0.4% decline leaving the rate of starts at 1.031 million for April. Multifamily construction expanded considerably, rebounding from a weak March and rising by 30.6% to an annualized 329,000 units underway. The outlook for future construction did dim a bit, as permits for future projects fell by 3%, a second straight decline. Much of this was due to lower permitting activity on the multifamily side (-7.4%); single-family permits only eased by 0.8%.

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Per the Mortgage Bankers Association, applications for mortgages edged higher in the week ending May 10 with a 0.5% increase. Requests for funds to purchase homes declined by 1.7%, reversing a gain to start May and showing little forward momentum in the middle of the spring homebuying season. Applications for loans to refinance existing mortgages posted a 4.5% increase, backing up a 4.7% rise in the week of May 3. Thirty-year fixed mortgage rates remain above 7% for prime borrowers, but this doesn't seem to be much deterring homeowners, most likely those who are seeking to extract equity from homes whose values have soared in recent years.

Initial claims for unemployment benefits did throttle back a little after posting a their highest figure since last August a week ago. The 222,000 new applications for unemployment insurance in the week ending May 11 was a 10,000 drop from the prior week, and there may be a slight and gradual uptrend in claims starting to form. There have been five weeks with 220,000 or more claims so far in 2024 and three have come in the last six weeks. Still, even with the recent firming, initial claims remain at very low and pretty stable levels.

The freshest economic data out this week seemed to be a mixed bag. Better CPI, worse PPI and import prices. Poor showing for manufacturing in NY, better one in Philly. Builders have the blues, but housing starts pushed higher. Retail sales came in flat, but consumers have just come off a two-month spending binge. Claims for unemployment insurance are elevated compared to their recent trend but lower than a week ago, and so on.

Current Adjustable Rate Mortgage (ARM) Indexes

IndexFor The Week EndingYear Ago
May 10Apr 12May 12
6-Mo. TCM 5.42% 5.37% 5.15%
1-Yr. TCM 5.13% 5.12% 4.75%
3-Yr. TCM 4.62% 4.67% 3.63%
10-Yr. TCM 4.48% 4.48% 3.47%
Federal Cost
of Funds
3.893% 3.889% 3.239%
30-day SOFR (daily value) 5.32374% 5.33002% 4.81734%
Moving Treasury Average
(MTA/12-MAT)
5.153% 5.114% 3.977%
Freddie Mac
30-yr FRM
7.09% 7.10% 6.39%
Historical ARM Index Data

The economy will likely need to run at a sub-potential pace for at least a period of time to help inflation pressures to again trend downward. With only some April reports to infuse the model, the GDPNow tracker from the Federal Reserve Bank of Atlanta puts growth in the second quarter at a current 3.6% rate, still way too warm to help trim price pressures. Something closer to the 1.6% (subject to multiple revisions yet) seen in the first quarter of 2024 would actually be better, or at least would be likely to produce faster results.

One somewhat better inflation report isn't much to go on, but it certainly beat the alternative of another month of stronger price increases. Investors chose to focus on the positive, and the yields that influence retail mortgage rates settled back rather a bit this week. We're pretty confident that the decline in them will translate into a 8-11 basis point decline in the average offered rate for a conforming 30-year FRM as reported by Freddie Mac next Thursday. By then, we'll have learned how home sales fared in April, too.

What's the outlook for mortgage rates for much of the spring homebuying season? See what we think when you take look at our latest Two-Month Forecast for mortgage rates, covering April into early June.

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; come July, we do an interim review of our expectations. Have a look and see if you think we're off or on point with our long-range forecast.

For a really long-run outlook, you'll want to check out "Federal Reserve Policy and Mortgage Rate Cycles".

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In most areas, home prices have been rising for years. If you're curious about how much home equity you have -- or will have at a future date -- you should check out HSH's KnowEquity Tracker and Projector, our unique home equity calculation and forecasting tool.

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