Economy in flux, but mortgage market sees positive activity

It was a rocky week for Wall Street as investors digested a host of economic data including weak retail sales, positive producer price index numbers and news of large layoffs at massive tech firms.

It was mid-week when the S&P 500 posted its worst day in more than a month while the Dow Jones closed 600 points lower. Data from the Commerce Department showed consumer spending slowed by 1.1% in December as Americans struggle against inflation. This bolstered concerns about inflation and pushed investors to take a much more cautious approach ahead of the Federal Open Market Committee's February 1 meeting.

There was positive news from the Labor Department showing the producer price index (PPI) declined by 0.5% month-over-month—economists had predicted a 0.1% decline. It was the largest monthly decline for the PPI since April 2020. 

Mixed opinions from Fed Presidents about the current state of the economy have also left investors in a state of flux. Currently, investors are expecting an increase of 25- to 50-basis points at the Fed's next meeting on Feb. 1. But, St. Louis Fed President James Bullard is in favor of a quicker move above 5% for the federal funds rate. Bullard's hawkish stance of "frontloading" rate increases, like the Fed did last year with consecutive 75-basis point hikes, worked well. 

Boston Fed President Susan Collins agrees the overnight lending rate needs to move above 5% where it should say "for some time," but her approach for when we reach that level was more dovish. “More measured rate adjustments in the current phase will better enable us to address the competing risks monetary policy now faces – the risk that our actions may be insufficient to restore price stability, versus the risk that our actions may cause unnecessary losses in real activity and employment,” Collins said.

The results of the government data and comments from the Fed presidents sparked a flight to government bonds, pushing the yield on the 10-year Treasury note down by 14 basis points. On Wednesday of last week, the 10-year hit 3.88%, its lowest level since September 2022. 

MORTGAGE RATES MOVING DOWNWARD, DEMAND RISING

There has been a lot of good news for homebuyers recently as mortgage interest rates continue to decline. The latest Freddie Mac 30-year fixed-rate mortgage average declined again week-over-week, hitting 6.15%. Freddie Mac economists attribute the decline to positive news about inflation, saying "As inflation continues to moderate, mortgage rates declined again this week. Rates are at their lowest level since September of last year, boosting both homebuyer demand and homebuilder sentiment. Declining rates are providing a much-needed boost to the housing market, but the supply of homes remains a persistent concern."

Supply will become even more of an issue as demand starts to creep back up. The Mortgage Bankers Association's data showed that mortgage applications jumped by 28% for the week ending Jan. 13. The increase came from both refinances and purchases as the dip in rates benefitted both parties. 

The MBA's new home purchase application data showed a different story, however with new home purchase mortgage applications declining by more than 25% in December compared to December 2021. Joel Kan, the MBA's Vice President and Deputy Chief Economist, said in their release "The decline in activity was in line with single-family housing starts that were 32 percent lower than a year ago. Higher mortgage rates and a weakening economy held back buyers at the end of last year."

There is some positive news on the homebuilder front this past week as builder sentiment increased for the first time in a year. The National Association of Home Builders/Wells Fargo Housing Market Index rose by 4 points to 35. Just one year ago, the index had a reading of 83. Anything above 50 is considered positive.NAHB Chairman Jerry Konter said of the increase, "It appears the low point for builder sentiment in this cycle was registered in December, even as many builders continue to use a variety of incentives, including price reductions, to bolster sales." Konter continued, "The rise in builder sentiment also means that cycle lows for permits and starts are likely near, and a rebound for home building could be underway later in 2023."