Market Review - April 22, 2024

Market Review - April 22, 2024

A bit more than two months ago, investors had all but convinced themselves that inflation was fading, and the Fed would soon be cutting interest rates. Leaning into this, long-term interest rates declined measurably, pulling mortgage rates down along with them, and equity markets powered to new highs. The calendar turned, ending the quarter and year, and for January investors were left to consider more closely what the Fed might do and how soon, and the debate began to focus not on when rates would be cut, but how many times.

After weeks of a flat pattern for interest rates and mortgage rates, it almost seems as though investors were waiting to see if the latest inflation data would allow them to decline anew or change course and reverse at least some of their considerable decline that closed 2023. Unfortunately, and with rates already rather firmer than they have been in weeks, the fresh and less-favorable data will push mortgage rates a bit higher still.

Firmer mortgage rates won't be welcomed by potential homebuyers as we nudge our way into the spring homebuying season. Even so, members of the National Association of Home Builders seem as though they are expecting a better time of it than they have in about six months. The February update for the NAHB's Housing Market Index revealed another gain, this time a four-point improvement to 48, a figure just below this series par level of 50. The single-family sales measure broke over that mark with a four-point rise of its own lifting this component to 52, while expectations for sales conditions over the next six months rose by three to 60, considered to be a robust level. The improved outlook was helped along by a four-point improvement to traffic levels at model homes and sales offices, although at 33 for February, it remains pretty low, if the best mark for this component since last August.

Builders were happier despite starting construction on fewer homes in January. Housing starts for last month slumped by 14.8% compared to December, pulled down by a 4.7% drop in single-family starts but perhaps by a 24.5% fall in those for multifamily dwellings. Single-family starts are the largest and most important portion of the market and starts here remained over the 1 million level for a third consecutive month, which likely was the source of improving homebuilder optimism. Permits for future residential construction held up well, posting only a 1.5% decline for January to 1.470 million (annualized) units, with single-family project permits up by 1.6% and multifamily permits down by 7.9% for the month. Housing starts are subject to things like weather conditions, and there are often considerable revisions to these monthly totals. For example, starts for December were initially reported as 1.460 million (annualized), but this figure was revised upward to 1.562 million, so last month's initially reported decline was subsequently revised to be an increase.

Requests for mortgage credit declined in the latest week. The Mortgage Bankers Association reported that applications for home loans retreated by 2.3% in the week ending February 9. Applications for funds to purchase homes declined for a third straight week, falling by 2.3%, and were joined by a 2.1% fall off in requests for funds to refinance existing loans. With mortgage rates firming up again, already meager refinance activity will probably settle back further, but purchase activity should start picking up as warmer weather comes along.

It's unfortunate but not unexpected that mortgage rates have turned a bit higher again. It's quite common to see interest rates move both higher and lower than is warranted by current and emergent information. This was the case when mortgage rates moved to 22-year highs last fall amid easing inflation and monetary policy that hadn't changed for months and was again the case when mortgage rates moved down by more than a full percentage point through January, despite little change in inflation or in the stance of monetary policy.

Such moves are built on hopes and expectations, awaiting confirmation of them, and when the confirmation doesn't come, at least a partial reversal of the (up or down) trend is the outcome. At present, with no confirmation of cooling inflation and fading hopes for near-term rate cuts, this means mortgage rates have risen and still have some space yet to rise as they try to find a place of better alignment with the changing economic reality. The increase in mortgage rates this week -- a 13 basis point jump -- is likely to be followed up with another for next week. We think something on the order of another 11-14 basis point increase isn't out of the question for the average offered rate for a conforming 30-year FRM as reported by Freddie Mac Thursday. Even so, this rate should still be about a full percentage point below last fall's peak levels, and that's at least a source of encouragement if nothing else.


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