The Fed's June shift in expectations for short-term interest rates seemed to catch markets leaning the wrong way to a degree. The June "pause" in lifting interest rates did come as expected, but was to be short-lived, given Fed members' projections of where they thought monetary policy would go for the rest of 2023. Instead of the June pause perhaps presaging a longer spell of unchanged policy rates, the Summary of Economic Projections clearly revealed that the pause would be only a one-off "skip” and suggested that it wouldn't be long before at least one rate hike, would be in the cards.
Things will likely become a little trickier for the Fed over the next couple of months. There's a longer-than-usual gap between the July and September meetings (about 8 weeks instead of the usual 6) and so there is rather more data to consider before the next policy move comes.
We already saw one of those PCE reports, for June: in it, inflation cooled again, with core PCE inflation decreasing to a 4.1% annual clip, its best showing since September 2021. While still about two times the Fed's desired level, it has shown considerable deceleration, as this same measure was running at a 5.2% annual rate as recently as last September. For those interested in the math, that's a 21% decline in core inflation in just the last 10 months, so core inflation is cooling at a fair clip.
Compared to last year, mortgage rates have had a relatively calm first half of 2023, but there has been enough volatility to see the average conforming 30-year FRM wander in a 70 basis point (0.70%) range over the first 26 weeks of the year, but staying within the boundaries we expected. So far, 30-year FRMs have been as low as a comparatively cheap 6.09% and as high as a rather uncomfortable 6.79%, but our expected forecast range is still holding. Here's hoping rates spend more time toward the lower portion of our range over the next half of the year, but this may be difficult, given stubborn inflation and a Fed again pointing toward higher short-term rates before long.
While there is no doubt still-considerable desire to buy a home, decreasing affordability due to high home prices and high mortgage rates are contributing to the significant slowing in sales. This put a damper on the kind of marketconditions where folks were often paying above asking prices for available properties. That's really no longer the case, and with these headwinds already in place and the typical seasonal slowing in activity, there's a very good likelihood that home price increases will move to flatline in the next few months, at least on a national level.
We're already starting to see greater-than-seasonal declines in home prices -- and on a more widespread basis -- than is typical. Using National Association of Realtor data covering the top 50 metro areas, it's not uncommon to see up to half of the metros showing lower home prices in the third quarter than in the second of each year, and usually more metros show this pattern from the third to the fourth quarter. For 2022, 41 of the top 50 metros (82%) posted lower prices in the third quarter compared to the second, and the national median home price for the period was also lower, too.
There's a good chance that there's only a slight residual bump in mortgage rates at most for this week. We'll hedge those possible outcomes, and expect an increase of perhaps a basis point or three in the average offered rate for a conforming 30-year fixed-rate mortgage.
