Financial markets are still adjusting to the upheaval that began August, when a mix of softer labor market data collided with an abrupt currency-trade unwinding. Although the yield on the influential 10-year Treasury rebounded smartly from those knee-jerk lows of a few weeks ago, the change in direction so far has had only a surprisingly muted impact on mortgage rates.
While the latest economic data hasn't provided any reason for mortgage rates to continue to decline, the mixed nature of it in the last week also hasn't provided any reason for much increase, so only a modest firming was seen. It's not as though there was direct "offset B to datapoint A", but rather simply enough upside to counter some downside.
While the latest economic data hasn't provided any reason for mortgage rates to continue to decline, the mixed nature of it in the last week also hasn't provided any reason for much increase, so only a modest firming was seen. It's not as though there was direct "offset B to datapoint A", but rather simply enough upside to counter some downside.
The important data on inflation this week was broadly positive as prices continued a mostly mellow path. The Producer Price Index kicked off the data flow, posting an increase of just 0.1% in July, a little less than forecast and down from 0.2% in June. This helped trim the annual rate for overall PPI back to 2.3%, chopping the top off its recent peak, although it is still measurably above the 1% rate at which it began 2024. Core goods prices firmed up a little last month, rising 0.2%, lifting the annual rate of this component to 2.1% in July from 1.9% a month prior, and part of a four-month upward trend. Producer input costs for services dropped back 0.2%, the first easing since December, and non-goods costs have increased by 2.6% in the year ended July (down from 3.5% annual in June).
Homebuilders have had the blues for a while now, as the barely modest enthusiasm they expressed as recently as April has faded since. The National Association of Home Builders Housing Market Index retreated by another two points in August, sliding to 39, just a little above the gloomy levels at the end of 2023. Homebuilders rated current (single-family sales) conditions to be less to their liking, and this reference declined two points to 44 for the month. However, expectations for sales conditions six months hence edged higher, likely due to hopes for lower mortgage rates; at 49, this outlook is just below the par level of 50 used in this series. Buyer traffic at sales offices and model homes continued to be weak, fading by another two points to 25, retreating to last winter's levels.
With sales of new homes slow and inventories of new housing stock at bloated levels it's no surprise that residential construction is stalling. Housing starts in July slumped by 6.8%, with overall starts falling to a 1.238 million annual pace, the slowest construction since May 2020. While hurricane Beryl may have had some impact on the totals, single-family starts cooled by 14.1% to a 851,000 annual rate, retreating to a level last seen in March 2023, while starts of multi-unit projects actually rose by 14.5% to a 387,000 annual rate. Permits for future housing construction eased by just 4%, perhaps reflecting some of builders' rate-cut optimism, with nearly all the decline due to lower permitting activity for multifamily projects.
A couple of weeks back, one of the worries that helped power the rally in bonds (and selloff in stocks) was that labor conditions were suddenly deteriorating. At that time, initial claims for unemployment benefits pushed up to 250,000, their highest point since late 2021. Since then, though, the longer-run pattern seems to have resumed, and initial claims -- probably also affected in various ways by Beryl -- have settled back down again, alleviating concerns. In the week ending August 10, initial requests for unemployment assistance dropped by another 7,000 people, landing at 227,000 for the week -- back to about where they were in early July. Claims have mostly moved away from levels that suggest increasing layoffs and/or folks having trouble finding new positions, which is a positive, but we won't know how August labor conditions are faring for a few weeks yet -- until the Friday after Labor Day, in fact.
Mortgage rates dropped a week ago and mostly held there through last week, giving at least some folks a chance to take advantage of lower rates. The Mortgage Bankers Association reported that requests for mortgage credit rose by 16.8% in the week ending August 9, with applications for refinancing leading the way with an impressive 34.5% increase. At present levels for rates, the pool of potential folks who can profitably refinance is finite, but there were obviously at least some who have been waiting for a chance to grab a lower rate. These are most likely homeowners conducting streamline FHA and VA refinances, plus perhaps a few folks doing conventional cash-out refinances too. Applications for funds to purchase homes improved by 2.8%, but it will take lower rates that hang around for a while to get home buying picked back up again.
We expected to see a fair bit of rebound in mortgage rates last week, but it failed to materialize, much to the benefit of mortgage-seekers. The most recent inflation updates coupled with the mixed tenor of the economic data make it seem as though not much rebound in rates should be expected. The influential yields and rates that underlie mortgages are up from their recent bottoms, but seemingly not enough to press mortgage rates much higher, if at all.
The economic calendar lightens up a bit this week, but we'll get a look at new and existing home sales from July, which probably won't be all that much to get excited about. If rates can manage to hang around present levels for a while longer yet, we just might see some improvement in sales as the August and September sales numbers come rolling along. At present, it looks as though rates will hold near this week's levels for next week, when we expect to see perhaps a slight increase in the average offered interest rate for a conforming 30-year FRM as reported by Freddie Mac. That said, it wouldn't surprise us one bit if rates failed to move or even eased a basis point or two, as investors seem to be becoming more comfortable with the overall economic and inflation picture again.
