It looks like the mortgage industry might finally be on a path to normalization. The latest Freddie Mac 30-year fixed-rate mortgage average came in at 5.3%—that's a half percent lower over the last two weeks. That drop did little to spur more mortgage activity, which might actually be a good thing. Mortgage demand has slowed considerably dropping nearly 5.5% week-over-week according to the Mortgage Bankers Association weekly survey. Home purchase applications were also down 4% for the week and 17% year-over-year. Keep in mind we are also comparing numbers this year to 2021's record highs across the board, so the drops will feel more precipitous when they're actually putting us more in line with what a 'normal' housing market would feel like.

Seemingly insatiable demand is what started driving home prices rapidly higher during the pandemic as many families fled apartments in larger cities for homes in the suburbs. That created untenable bidding wars and drove home prices to extremely high levels. That, plus millions of homeowners refinancing their homes to lower rates and not selling, decimated inventory and only put stronger upward pressure on home prices.

Our current climate of elevated home prices and higher interest rates has started to quell the demand which is allowing inventory to start coming back toward what's considered healthy. The latest report from the National Association of Realtors showed existing home inventory sitting at 2.6 months in May, up from 2.2 months in April. Typically 6 months supply is considered a balanced market but this month-to-month increase is a big deal. 

The caveat is that this drop in demand and interest rates trending lower are being caused by fears of an economic recession. As Freddie Mac's economists note, "Over the last two weeks, the 30-year fixed-rate mortgage dropped by half a percent, as concerns about a potential recession continue to rise. While the drop provides minor relief to buyers, the housing market will continue to normalize if home price growth materially slows due to the combination of low housing affordability and an expected economic slowdown."

Last week we discussed the yield curve inversion and how flat the curve was at the end of June. Well in the first week of July, the 10- and 2-year Treasury note yields inverted and remained inverted for most of the week. That is a key indicator of a coming recession. 

The Federal Open Market Committee (FOMC) members have also made it clear, along with Federal Reserve Chairman Jerome Powell, that they are willing to sacrifice economic growth in order to control rampant inflation. It's expected that the FOMC will vote to raise the federal funds rate at its July meeting by another 50 to 75 basis points. Minutes from their June meeting show that policymakers "recognized the possibility that an even more restrictive stance could be appropriate if elevated inflation pressures were to persist."

Powell has also said previously that the employment situation might also suffer as the Fed restricts monetary policy to control inflation. The June jobs report is not reflecting that quite yet as 372,000 jobs were added, according to the Labor Department. Economists had expected an increase of 250,000. The unemployment rate was unchanged at 3.6%. What's important to remember about the jobs report is that the data is collected in a survey based on the weekly pay period that includes the 12th day of the month. The Fed instituted a rate hike on June 16 so any employment or economic consequences happening after the 12th of June would not be included in this report. This is typically why economists will look at a rolling average of a few weeks or months of data across a range of sectors before making any decisions. So while June's numbers are important, it will take time to see the true effects of the Fed's rate hikes play out in the labor data.