Market Review - May 20, 2024

Market Review - May 20, 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.

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.

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.

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.

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 Thursday. By then, we'll have learned how home sales fared in April, too.

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