Newsletter - 10/31/2022
Week of October 24, 2022 in Review
Home sales continued to cool in September while consumer inflation needs to cool further. Find out more about these stories, along with the latest news on home price appreciation, GDP and Jobless Claims.
- Consumer Inflation Needs Cooling
- Signed Contracts on Existing Homes Fall for Fourth Consecutive Month
- After August’s Uptick, September New Home Sales Fall
- Annual Home Price Appreciation Declines But Remains Strong
- GDP Turns Positive in the Third Quarter … For Now
- Latest Jobless Claims Signal Slower Pace of Hirings
Consumer Inflation Needs Cooling
The Fed’s favorite measure of inflation, Personal Consumption Expenditures (PCE), showed that headline inflation rose 0.3% in September and remained at 6.2% year over year. Both readings were exactly in line with estimates. Core PCE, which strips out volatile food and energy prices, rose by 0.5% with the year-over-year change rising from 4.9% to 5.1%.
What’s the bottom line? When the Fed says they want to see inflation fall to around 2%, they are talking about annual Core PCE, which is at 5.1% and quite a bit higher than the Fed’s target. But there is some hope that inflationary pressures could begin easing.
Inflation is calculated on a rolling 12-month basis, which means that the total of the past 12 monthly inflation readings will give us the year-over-year rate of inflation. For example, when the data for September 2022 was released last week, it replaced the data for September 2021 in the calculation of annual inflation. Inflation readings after September of last year are higher comparisons, so if we see lower monthly readings this fall and early next year, the annual rate of inflation could then move lower.
Signed Contracts on Existing Homes Fall for Fourth Consecutive Month
Pending Home Sales fell 10.2% from August to September, marking the fourth straight monthly decline. Sales were also 31% lower than in September of last year. This is a critical report for taking the pulse of the housing market, as it measures signed contracts on existing homes, which represent around 90% of the market.
What’s the bottom line? Lawrence Yun, chief economist for the National Association of Realtors, noted that new home listings are lower than they were a year ago because many homeowners are staying put with 3% mortgage rates that they locked in before this year. He added, “Only when inflation is tamed will mortgage rates retreat and boost home purchasing power for buyers."
After August’s Uptick, September New Home Sales Fall
New Home Sales, which measure signed contracts on new homes, fell 10.9% in September to a 603,000-unit annualized pace. However, this was stronger than estimates looking for a 13% decline.
There were 462,000 new homes for sale at the end of September, which equates to a 9.2 months’ supply. However, only 56,000 or about 12% were actually completed, with the rest either not started or under construction. The number of completed homes equates to a 1.1 months’ supply, well below the six months’ supply that is considered representative of a balanced market.
What’s the bottom line? Homebuilders have seen declining buyer traffic in recent months. For example, Lennar, the second largest homebuilder in the U.S., reported that new sales orders fell 12% in the third quarter when compared to the same timeframe last year. PulteGroup, another large builder, reported that 24% of contracts were canceled in the third quarter. While this sounds alarming, it’s important to note that even in a hot market like the second quarter of this year, they reported 15% cancellations.
Annual Home Price Appreciation Declines But Remains Strong
The Case-Shiller Home Price Index, which is considered the “gold standard” for appreciation, showed home prices fell 1.1% in August but they were 13% higher when compared to August of last year. This annual reading is a decline from the 15.6% gain reported in July but still strong.
What’s the bottom line? While Case-Shiller’s national index did show a month-over-month decline, the majority of the decline was seen in some of the larger cities like San Francisco (-4.3%), Seattle (-3.9%), San Diego (-2.8%), Los Angeles (-2.3%), Denver (-2.3%) and Phoenix (-2.1%). When removing these cities that were overheated, most other markets were relatively flat.
GDP Turns Positive in the Third Quarter … For Now
The advanced or first reading of third quarter GDP showed that the U.S. economy grew by 2.6%. This was better than the 2.3% expected and follows two consecutive negative readings in the first and second quarters of this year.
What’s the bottom line? It’s important to remember that this is the first of three readings, and there can be significant revisions when the second and final readings are released on November 30 and December 22, respectively.
Latest Jobless Claims Signal Slower Pace of Hirings
Initial Jobless Claims rose by 3,000 in the latest week, as 217,000 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, rose 55,000 to 1.438 million.
What’s the bottom line? Initial Jobless Claims still remain quite low, as employers continue to hold onto workers. However, Continuing Claims have risen significantly over the past few weeks. This reflects a slower pace of hiring, which can be the first thing to ease in an economic downturn, followed by layoffs. On Friday, the Bureau of Labor Statistics will release the Jobs report for October, and estimates call for 190,000 jobs created, which would be the slowest since a negative print was seen in December 2020.
What to Look for This Week
The Fed and labor market data will be the key headlines this week as the Fed’s two-day meeting begins on Tuesday, with the Monetary Policy Statement and press conference coming on Wednesday. The Fed is expected to again hike its benchmark Fed Funds Rate to help cool inflation. Investors will be closely watching their actions and commentary.
Mortgage Bonds continue to battle their 25-day Moving Average. If they can remain above it, there is a lot of room to the upside before reaching the next ceiling at 100.141. The 10-year ended last week trading at around 4.01%, after getting rejected from its 25-day Moving Average support level.
Information (weekly review) was provided by Mark Hedman
Homebridge Financial Services - Sales Manager, Mortgage Loan Originator