Why CPI Matters, Even If Your Clients Don’t Know What It Means
Forecasts for next week’s Consumer Price Index (CPI), were released on Friday and expectations are for inflation to drop from 8.5% to 8.1% with a negative 0.1% month-over-month reading for August. If these expectations come true, it could be a huge win for mortgage rates. The drop could bring much needed relief after August’s volatility saw the national average 30-year fixed jump from 5.0% to 5.99%.
Then in the first week of September, rates moved even higher to 6.25% as the bond market reacted to Russia’s cutting off natural gas to Europe indefinitely, Bed Bath and Beyond’s CEO’s suicide, Queen Elizabeth’s passing and strong employment numbers giving the Fed the okay to raise the Fed Rate by 0.75%.
So why give consumers a nudge? Because long term mortgage rates follow inflation…because inflation steals purchasing power. The Fed raising the federal funds rate aggressively will impact credit cards, car loans, and HeLOCs, slowing down consumer spending. Consumer spending is 70% of the national GDP. Slowing demand will take pressure off supply, reducing future prices. Hence, inflation and longer-term bonds move together. If the trend continues, next week’s CPI report will result in some much-needed relief from our recently rising mortgage rates.
In the comparison chart below, provided by MBS Highway, you see inflation and the 30-year mortgage rates move together. Quantitative easing kept rates artificially low and as soon as it was over, rates started to spike. July’s 0.0% month over month gain replaced last year’s 0.5%. August is expected to drop 0.1%. This will replace last year’s 0.3%, which is why expectations are for 8.1% annual inflation 0.4% lower from last month’s 8.5%. Inflation started to climb fast after September. Big moves from the Fed could see those bigger 2021 number replaced, dropping inflation more. Having said that.. global supply chain issues, income growth and housing stability will keep inflation well above the Fed’s 2% target for some time to come.
What do Tristan, Molly, and Rene have in common?
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You Heard Homeowners Are Losing Value
As mortgage rates touched 6.25% again this week, sellers are dropping prices and Google’s “homes for sale” search dropped 25% from a year earlier. Black Knight also released their July data showing for the first time in 32 months a drop in home prices, 0.77% from June to July. It’s expected to see a seasonal slow down of home prices, it’s just usually in October. The annual home price appreciation was still 14% nationally in July.
On the flip side, “tappable equity”, that amount a homeowner can borrower against while keeping 20% equity stake in the property hit its 10th consecutive quarterly record high in the second quarter of 2022 at 11.5 trillion. If home values peaked early, we will see this number fall slightly for the 3rd quarter.
Black Knight’s “on paper” loss of value will grab the attention of headlines but the truth is in the real numbers. Homeowners have an average of 58% equity, the highest equity on record. As the market shifts, sellers simply won’t sell. Homeowners will hang onto their fixed mortgages rates in the 2’s and 3’s and allow a little of the froth they gains to settle in.