A significant week in Washington ended with the Senate passing the Fiscal Responsibility Act to raise the debt ceiling and cap government spending for two years. The passing of the bill prevented what could have been the first-ever debt default by the United States and helped the mortgage industry avoid what could have been a massive increase in mortgage rates.

The next Federal Open Market Committee meeting is set for June 13-14 and there are mixed opinions about whether the FOMC will choose to implement another interest rate hike. Some Fed officials were quoted this week as saying skipping a rate hike this month would allow the Fed to acquire more data before making its decision while other economic analysts are saying the markets have already priced in another hike. 

SLIGHT UPTICK IN RATES AS HOME PRICES STILL MOVING UP

Freddie Mac's 30-year fixed-rate mortgage average increased by 22 basis points week-over-week and now sits at 6.79%." Although there has been a steady flow of purchase demand around rates in the low to mid six percent range, that demand is likely to weaken as rates approach seven percent."

Home prices are still an issue and have now shown two consecutive months of price appreciation. The S&P CoreLogic Case Shiller National Home Price Index showed a 0.7% increase from February to March. While that does not indicate that we are in for another spike like we saw in 2021-2022, it does suggest that the stress of high competition for a very low inventory of homes is keeping us in a sellers' market. 

The Federal Housing Finance Agency's (FHFA) home price index rose by 4.3% year-over-year in Q1 and was up 0.5% from Q4 2022 through Q1 2023. What's interesting about both the Case Shiller and FHFA reports is that home prices were still showing steady decreases in the west. Craig J. Lazzara, managing director at S&P DJI, said in the Case Shiller release that, "The farther west we look, the weaker prices are, with Seattle (-12.4%) now leading San Francisco (-11.2%) at the bottom of the league table. It's unsurprising that the Southeast (+5.4%) remains the country's strongest region, while the West (-6.2%) remains the weakest."

The FHFA's data reflected that same sentiment. Dr. Anju Vajja, Principal Associate Director in FHFA's Division of Research and Statistics, said "…year over year prices in many western states have started to decline for the first time in over ten years."

BANK DEPOSITS COULD AFFECT FUTURE RATES

Another part of the economy you might want to watch is the banking sector. Recently, the Federal Deposit Insurance Corporation (FDIC) revealed that bank deposits declined by 2.5% in the first quarter of this year. We have now seen four straight quarters of declining bank deposits and this is the largest percent decline in deposits since government regulators started tracking this statistic nearly 40 years ago. 

This is important in the mortgage world because banks are some of the biggest buyers of mortgage loans—whether directly or in the secondary market. During the pandemic when banks were flush with cash as part of the government stimulus, they were able to issue mortgages at extremely low rates. Now, as bank deposits have retreated, you're seeing banks pull back from the aggressive pricing and bank mortgage rates continue to increase. This is not a reason to be nervous as we are just 'normalizing' back to levels we've seen for the better part of a decade. 

This just helps explain why you're seeing mortgage rates where they are. Chart number 7 in this release from the FDIC will give you a better visual on where we were before and during the pandemic vs. where we are now. 

RESILIENT LABOR MARKET MAY PROMPT FURTHER FED ACTION

The end of the week also brought another jobs report from the Labor Department that has caught the attention of investors. The report showed non-farm payrolls rose by 339,000 in May which was significantly higher than the Dow Jones estimate of 190,000. Unemployment came in at 3.7% against estimates for 3.5% and May also marked the 29th straight month of positive job growth. 

Private payrolls also posted yet another strong month of gains with 278,000 jobs added in May as reported by payroll processor ADP. Dow Jones estimates forecasted 180,000 private sector jobs added for the month. ADP's analysts called the report "fragmented" however as larger companies (500 or more employees) shed 106,000 jobs while small companies (fewer than 50 employees) added 235,000. 

The seemingly unwavering labor market has increasingly been a thorn in the side of the Federal Reserve as the group tries to cool inflation without significantly slowing down the U.S. economy.