Determining how people are feeling largely depends on the questions you ask them. Just two weeks ago, there was a pronounced May downturn in Consumer Sentiment as measured by the University of Michigan. This week, the opposite was seen in the measure of Consumer Confidence as reported by the Conference Board. For May, this gauge of consumer goods rose by 4.5 points to a 102.0 level, retaking nearly all the ground it lost in April. Current conditions were assessed to be somewhat more favorable, as the 2.5-point increase in this component about split two prior monthly values. Expectations for the near-term future improved more appreciably, sporting a 5.8-point increase to 74.6, a three-month high. While plans to buy expensive items were mixed (autos flat, homes down, appliances up), expectations for inflation were higher, rising a tenth of a percentage point to 5.4%, the highest it has been since December.
Plans to buy homes were down unsurprising, given high mortgage rates, high home prices and still rather little available to buy. This pessimism was also seen in the April update of pending home sales from the National Association of Realtors. The Realtors' PHSI declined by 7.4% for the month, and the index value of 72.3 was the lowest ever seen in a data series that now covers 23+ years. While more homes to buy appear to be coming on market, the challenging affordability conditions that currently exist don't suggest that a sharp increase in sales will come even if there are more homes to buy. For that to occur, we'd need to see stocks of homes for sale improve in the markets with the most demand, and even then, these would need to be both desirable and affordable to the audience seeking them. Such a fortunate confluence of those elements hasn't been seen in housing for a good while.
Applications for mortgage credit retreated in the week ending May 24. While there may be a bit of holiday weekend effect in the 5.7% decline in applications reported by the Mortgage Bankers Association, it's also the case that mortgage rates firmed back up a little during their survey week. Firmer rates likely deterred requests for funds to refinance existing loans (-13.6%) but also those for purchasing homes (-1.1%) as well. Even firmer rates this week (and the other side of the holiday weekend) will probably see little improvement in mortgage applications for the closing week of May, as well.
What we can say with certainty is that mortgage rates moved much higher than was warranted by conditions toward the end of last year, and then moved much lower than was warranted by conditions earlier this year. It also doesn't seem like a coincidence that rates a few weeks ago returned to the midpoint between those two extremes, given the backdrop of somewhat firmer inflation, somewhat softer growth and the change in the prospects for monetary policy this year. At present, and as they have been over the last few weeks, 30-year fixed mortgage rates are a bit below the mid-point recent midpoint. At present, the slightly better-than-expected PCE report and slight pace of economic activity points to at least some stability for rates at present levels... at least until the next set of economic or inflation reports provides a nudge in one direction or the other.
These could come as early as this week, as wide-ranging reports covering service and manufacturing activity for May are due from the Institute for Supply Management, the May JOLTS report comes out and the May employment report is released. If not next week, that chance for change comes again as the next Fed meeting occurs on June 11-12; at that time, an updated Summary of Economic Projections will reveal any changes in Fed member's expectations as it pertains to employment and inflation trends, economic growth, and the forward path for monetary policy.
Based upon the way the influential yields that underlie mortgage rates moved this week, it would appear that we might see rates fairly stable to slightly higher over the next week. This week's bump in rates was a little more than we expected, but not all that much. Call it a few basis point increase in the average offered rate for a conforming 30-year FRM as reported by Freddie Mac Thursday.
