Home prices continue to be the talk of the mortgage industry as it appears more and more would-be buyers are biding their time. The latest Fannie Mae Home Purchase Sentiment Index showed that 66% of those surveyed said now is a bad time to buy a home because of rising home prices.

Those rising prices were initially offset by historically low interest rates which we are still seeing today. This week's Freddie Mac average for a 30-year fixed-rate mortgage came in at 2.87%. While that is a 10 basis point increase from last week's average, it's nearly a full 10 basis points lower than this week last year. If you look back two years ago, the average was at 3.60% and if you go back to 2018, the average was 4.53%. That gives you a better idea of just how low rates are staying right now.

More potential homebuyers did jump on the brief drop in rates at the end of July and into the first week of August. The weekly activity report from the Mortgage Bankers Association shows a 2.8% uptick in mortgage applications for the first week of August. The MBA's Associate Vice President of Economic and Industry Forecasting, Joel Kan, noted that refinance activity hit its highest level since February 2021. "The refinance share of loan counts was at 68 percent, compared to a 63.4 percent share for refinances by dollar volume, as purchase loans continue to see significantly higher loan sizes," said Kan. 

The significantly higher loan sizes have been mostly offset by the historically low rates. But as noted by Fannie Mae's survey, more and more potential homebuyers are finding it difficult to get past the price tag. Renters aren't getting much of a break either, though. Apartment Guide's latest Rent Report shows the average national cost to rent a 2-bedroom apartment is up 4.8% annually to $1,972 per month. A 1-bedroom apartment cost came in at $1,711 on average, according to their report.

As the breakneck pace of demand that we've seen over the last year shows signs of waning, it will be interesting to see if home prices start to fall and how fast. A lot will depend on what the Federal Reserve sees from the economy and the return of the labor market. As we mentioned last week, the Fed will be looking to see at least a few strong jobs reports in a row before it will start to taper its bond purchases. Those bond purchases have essentially kept the housing market chugging along as COVID put pressure on the economy.

Inflation: transitory data or long-term issue?

The Fed's stance that inflation is temporary took a couple of hits this week with the release of some closely watched data points. For the second-straight month, the consumer price index (CPI) remained at a 20-year high with a reading of 5.4%. The core CPI, which excludes more volatile measurements like energy and food prices, rose by less than expected on a monthly basis. July's data shows a 0.3% increase, against expectations of a 0.4% gain. The core CPI showed a 4.3% annual increase.

The core CPI report boosted the stock market and kept the yield on the benchmark 10-year Treasury note relatively unchanged. Typically, mortgage interest rates follow the rise and fall of the 10-year note yield. 

The producer price index (PPI) told a much harsher story. The Labor Department reported the PPI rose by a whopping 7.8% annually—that's a record high since the data point started being measured in 2010.

One positive was a third straight week of declining jobless claims. The Labor Department's weekly jobless claims report showed 375,000 initial claims of unemployment. Continuing jobless claims also fell, hitting 2.866 million for the last week of July. That's the lowest level for continuing claims since mid-March 2020.