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Home loan rates have ticked higher week to week but some bad economic news halted the rise. Let's discuss what happened and look ahead into next week.

Positive Bank Earnings Impact

The rise in home loan rates over the last couple of weeks has mainly been in response to good news from the banking sector. Corporate earnings from the likes of JPMorgan Chase, Bank of America, Charles Schwab, and others have lifted fears of a contagion from the recent bank failures. With those fears lifting, it has now brought focus back to the Federal Reserve, and the threat of more rate hikes.

Fed Rate Hike Coming

With bank failure fears easing, Fed officials have been speaking loudly about the need for more rate hikes. Some OK economic reports over the last week have also given the Fed cover to raise rates once again. Currently, there is an 85% chance the Fed will raise rates by 0.25% on May 3rd.

Now the question is will this be the last rate hike? Will 5.00% to 5.25% be the terminal rate? If you try to listen to Fed officials, you will hear a lot of mixed messages. Fed President Bullard was speaking out this week saying he wants to see the Fed Funds Rate at 5.75%, which is an additional .75% higher than current levels. Fed President Bostick had a more cautious tone, saying the Fed should raise rates one time and pause to see how the economy responds to all the previous hikes.

As you can imagine, the wildly different opinions from Fed members move the markets all over the place.

Inflation With Your Scones

The bond market is global. So, when interest rates move higher in other parts of the world, it puts upward pressure on our yields as well. Midweek, the UK reported consumer inflation of over 10%, when markets were looking for a reading below 10%. If that were not enough, food inflation ran at the highest clip since 1977. Inflation in England is now moving twice as fast as it is here in the United States, with our CPI at 5%. The stubbornly high inflation in the UK caused their interest rates to move higher, which lifted our interest rates to the highest levels in weeks.

3.60% Yield Resistance Holds

The 10-year Note yield, which ebbs and flows with home loan rates, is remaining beneath important yield resistance at 3.60%. This is a key technical level, which has been limiting the rise in rates over the past month. With the banking crisis looking less uncertain for now, there is a threat that rates will drift higher still. Staying beneath 3.60% would be an excellent sign for longer-term interest rates.

Bad News is Good News

Last Thursday, Weekly Initial Jobless Claims, a leading indicator of labor market health, came in worse than expected. It showed that more people signed up for first-time unemployment benefits. The bad news is good news for the Fed, which has been looking for an uptick in unemployment. On top of this, the Philadelphia Fed Index showed that manufacturing in that region slowed dramatically. Slower growth means less need for rate hikes.

Bottom line: Home loan rates have stabilized. Spring is in the air and the demand for housing remains high. Opportunities exist for nimble would-be buyers.

Last week home loan rates remained steady and near their best levels in six months. Let's discuss what happened and the technical factors that are limiting further rate improvement.

Consumer Prices are Coming Down

Consumer Prices fell in March, supporting the notion that inflation remains in a downward trend. The headline Consumer Price Index (CPI), which includes food and energy, came in at 5% year over year, a full 1% decline from the 6% reported in February. This is the slowest rate since May 2021 and that is a good thing.

When taking out food and energy, the more closely watched Core CPI declined less and is stuck at a still high 5.6%. Why? Shelter. The housing component of CPI makes up nearly 60% of the CPI reading. The good news? Housing is a lagging indicator within the inflation reading. Rents have declined for each of the last six months, and they will be reflected in future inflation readings. This is why rates remained steady after this report was released with a 10-year note yield hovering around 3.40%.

Fed Minutes Released

The Minutes from the March Fed meeting were released last Wednesday. There were no shocking details that moved the markets. In a further sign that the Fed is close to ending their rate hikes, all Fed members agreed that financial conditions would tighten due to the bank crisis which equates to further rate hikes.

Speaking of rate hikes, the chance of a .25% Fed rate hike in May is now 63%. Oddly enough, the financial markets are also pricing in as much as four rate cuts in the back half of 2023. If we see rate cuts by the summer, it would be a historically short amount of time between the last rate hike and first rate cut.

Watching the Charts

The bond market reacts to news, and they also react to price history and technical signals. Right now, Mortgage-Backed Securities (MBS) are battling a tough ceiling of resistance, which is holding prices down and keeping rates from further improving. Take a look at the chart section below.

As prices go up rates go down and vice versa. For home loan rates to improve further, MBS must break through and remain above its 200-day moving average.

3.38%

The 10-year Note yield is currently at 3.38%, which is also near its lowest levels in 6 months. For it to move lower still, it needs to fall convincingly beneath 3.30%.

Bottom line: Home loan rates are near the best levels of the year. Spring is in the air and demand for housing is high and despite the lack of housing supply, opportunities exist.

Last Week in Review: Dark Clouds Helping Rates

Home loan rates reached their best levels in two months on the heels of not-so-good news. Let's get into what happened and look into the week ahead.

Bad News is Good News for Rates

The JOLTS (Job Openings and Labor Turnover Survey) report, a leading indicator on the health of the labor market, showed signs of cooling. It revealed 9.8 million jobs available, 700k less than expected and the first reading under 10 million in three years.

If you consider how the labor market works for example, first firms stop hiring, then they cut hours and then if conditions persist, they lay people off. So, this could be a sign to the Fed that the labor market is finally showing some signs of slowing down, which is what they want to help lower inflation.

The good news? While the number of jobs available came in well below expectations, we are still seeing 1.6 jobs available for every person unemployed, which is indicative of a tight labor market.

Dimon Jawboning

Earlier last week, JPMorgan Chase CEO Jamie Dimon, shared his annual thoughts with shareholders. He stated that the problems in the banking sector are far from over and the chance of recession is elevated. Over the last several months, Mr. Dimon did suggest the economy was headed into an economic hurricane and then backed off that gloomy stance and suggested we might not see a recession. Now he is firmly back in the recession camp and upon his headlines, rates improved and stocks didn't.

Manufacturing is Not Manufacturing

The ISM Manufacturing index, which is a reading of our national manufacturing production, came in at 47. Readings beneath 50 suggest contraction or shrinking of production. This is not a good number and because bonds and rates like numbers that are not good, they rallied.

3.26%

During the week, the 10-year Note yield hit 3.26%, the lowest since September. Most importantly, as of press time, the 10-year yield fell well below its 200-day Moving Average. History has shown that when the 10-year moves convincingly beneath its 200-day Moving Average, it leads to better rates in the weeks and months ahead.

Bottom line: With signs of a recession looming in the months ahead and if inflation continues to decline, it could push home borrowing costs lower and buoy the spring buying season.

Last Week in Review: Banking Fears Ease

This past week, home loan rates ticked higher from the previous week in response to no dire news in the banking sector. Let's walk through the Fed Meeting and the other big events impacting the markets.

Contagion Fears Subside

No news was good news for stocks and bad news for bonds and interest rates. After two weeks of multiple bank collapses and central bank intervention, fears of contagion leading to other banks has eased a bit.

This removal of fear pushed home loan rates higher after they touched the best levels in over a month. And stocks which like less risk, enjoyed solid gains throughout the week.

Pending Home Sales Bodes Well for Housing

The February Pending Home Sales Index, a leading indicator for the housing sector, grew for a third straight month. It appears that housing sales may have bottomed as demand remains strong. With the Fed nearing the end of its rate hiking cycle, long-term rates having already peaked and the labor market still resilient, it all adds up to a bright outlook for housing.

Economic Growth Slowed into 2023

The final revision for 4th Quarter 2022 GDP came in at 2.6%, which was a slowdown from the 3rd Quarter 3.2% rate. The final GDP rate for 2022 was 2.1%...a sharp slowdown from the 5.9% rate in 2021.

The evidence of slowing growth may be music to the Fed's ears as they hope their previous rate hikes will slow the economy enough to lower inflation, while achieving a "soft landing" and where we could avoid a deep recession.

Home Price Gains Slowing is Good News

The Case-Shiller Home Price Index showed the broad-based 20-City Composite posted a 2.5% year-over-year gain in January, down from 4.6% in the previous month.

"2023 began as 2022 had ended, with U.S. home prices falling for the seventh consecutive month," says Craig J. Lazzara, Managing Director at S&P DJI.

This is yet another data point the Federal Reserve is happy to see. The Fed wanted to slow down housing and cool price gains, which make up a large portion of overall inflation. This backward and lagging indicator should help lower inflation in the months ahead.

50/50

As of press time, the easing bank fears have slightly elevated the chance of a .25% rate hike in May to 50%. The Fed had forecasted at the last meeting they will get the Terminal Rate, a fancy way to say peak in Fed Funds Rate to 5.1%. One more .25% rate hike will achieve this. With so many important economic reports and uncertainty in the banking sector, this story can change quickly.

Bottom line: With mortgage rates now near the levels seen in early February, when home sales jumped, there are signs the Spring housing market may be better than expected than just a couple of weeks ago.

Last Week in Review: Fed Raises Rates, Home Loan Rates Decline

This past week, home loan rates hovered near the lowest levels in over a month as the Federal Reserve raised rates once again. Let's walk through the Fed Meeting and the other big events impacting the markets.

Fed Funds Rate Hike

"Some additional policy firming may be appropriate" – FOMC Monetary Policy Statement on 3/22/2023.

This past Wednesday, the Federal Reserve raised the Fed Funds Rate by .25%, the 9th rate hike in just over one year. This lifted The Fed Funds Rate to a range of 4.75% to 5.00%. There was some speculation the Fed may pause hiking rates at this meeting amidst the fallout of the SVB and Signature Bank failures.

The good news was the quote above along with the Fed's updated Economic Projections are suggesting one more rate hike in May, so rate hikes could be nearing the end.

Credit Tightening

"Likely to see tighter credit conditions that weigh on economic activity." FOMC Statement.

This may be the main reason rate hikes are nearing their end. The SVB failure, uncertainty around potential bank runs and overall liquidity concerns will likely lead to banks making it tougher for small business and commercial loans. As Fed Chair Powell said in his press conference last Wednesday, "Credit tightening post-bank failure is akin to rate hikes."

Lower Rates Equal Housing Relief

A backward-looking housing report may reveal better times ahead for housing. Existing-Home Sales for February rose 14.5% from January, ending a 12-month streak of declining sales.

This good reading came on the heels of improved mortgage rates in January and February. With home loan rates now within a whisker of those levels and spring in the air, better days for housing lie ahead.

Bottom line: The end of Fed rate hikes is near and long-term rates, like mortgages, may have likely already seen their peak. With mortgage rates now near the levels seen in early February, when home sales jumped, it will be no surprise to see this trend continue through spring.

Last Week in Review: SVB Bank Fallout and Rates

This past week, home loan rates improved to their lowest levels in a month in response to the closures of Silicon Valley Bank (SVB) and Signature Bank. Let's walk through what happened as we approach the Fed Meeting this week.

SVB Failure And Rates

It's important to remember that bonds enjoy bad news, so when word broke earlier this week that SVB was shuttered by the FDIC, home loan rates improved to their best level in six weeks. At the same time, the 2-year Note yield, which tracks Fed rate hike activity, plummeted from over 5.00% to under 4.00% in just a couple of days. This was an epic decline in rates not seen even after 9/11 or the Great Recession.

The good news (in the case of SVB and even Signature) is that bad management, failure to manage interest rate risk and a widespread desire for depositors to gain access to their funds (bank run) is what caused these banks to shutter.

In response, the Federal Reserve immediately created a line of credit and an implicit backstop to protect any depositors from any losses. This was good news and will hopefully limit any further fallout in the banking sector.

So, what does the Fed do with rates now that we have high uncertainty and contagion risk in the banking sector?

Stability > Inflation

Seeing that one reason SVB failed was in response to a rapid rise in interest rates, there is increased pressure for the Fed to limit rate hikes going forward and regain stability in the financial sector.

Just last week there was a high probability the Fed would raise rates by .50. Now just days later, there is a 75% chance of a .25% and a 25% chance the Fed doesn't hike rates at all.

This week's Fed Meeting and press conference will hopefully have the markets feeling that the Fed is going to take every measure possible to ensure stability while they closely watch the pace of inflation decline.

Housing Numbers OK

It wasn't all bad news this week. Housing numbers for February highlighted the little rate relief we saw in January and brought some optimism into February. Both Housing Starts (which is putting the shovel in the ground), and Permits (a leading indicator of future building), came in better than expectations.

This bodes well for housing in the months ahead, especially combined with the rate relief we are experiencing.

Bottom line: Last week's news in banking has changed everything as it relates to the Fed and rate hikes. The markets are suggesting the Fed will be cutting rates in the second half of the year which is a big change from the rate outlook just days ago.

Last Week in Review: Powell Visits Capitol Hill

This past week, Fed Chair Powell testified on Capitol Hill and his words sent rates higher. Let's walk through what happened and take a peek at what to watch next week.

"Rates Need to Go Higher, Faster"

Last Tuesday and Wednesday, Fed Chair Jerome Powell testified before both the House and Senate on the state regarding the economy and monetary policy.

His prepared speech set off fireworks in the financial markets on Tuesday as stocks moved sharply lower, and rates spiked once again. He started by suggesting that rates need to go higher and faster. This was a surprise as the Fed Chair recently said, "The disinflation process had begun." He had the markets sensing there would be possibly three more .25% rate hikes.

As of this writing, things have changed a lot. Now, there is a 69% change of a .50% hike at the March Fed Meeting in two weeks. Before the Fed Chair spoke, the chance of a .50% was just 25%. The threat of even more rate hikes elevated short-term rates (which move closely with Fed rate hikes) to the highest levels in 16 years.

2-Year & 10-Year Yield Curve Inversion Widens

With the 2-year Note yield spiking to 5.00% and the 10-year yield remaining beneath 4.00%, we witnessed the largest yield curve inversion since 1981. Why is this important? Yield curve inversions are typically accurate in predicting recessions. So, seeing the widest yield curve inversion in decades suggests the bond market is screaming that a recession is likely to happen within the next 12 to 18 months.

"We do not think we need to see a sharp increase in unemployment to get inflation under control." Powell

Here, the Fed Chair is trying to soothe the markets on the notion they can hike rates more to help lower inflation and avoid a large uptick in unemployment. Currently the labor market remains very tight. There are still nearly 11 million jobs available and nearly half that amount of people unemployed, so there is a 5 million gap between jobs available and people to fill those positions.

Let's hope the Fed Chair is correct and inflation will continue to come down and we do not experience significant unemployment...as jobs buy homes.

Bottom line: The uncertainty, confusion and volatility in the financial markets has elevated pessimism in the economy and housing. History has shown when pessimism or optimism elevates, it's generally a contrarian indicator and a change in sentiment is forthcoming. The other good news? Despite all the noise, both inflation and home loan rates have likely peaked.

Last Week in Review: Inflation and The Fed Dominate Markets

This past week, home loan rates touched their highest levels since November. Let's walk through what happened and mention the big events in the week ahead.

Global Inflation Remains High

Back in early February Fed Chair Jerome Powell stated that the disinflation process has begun and that's a good thing. Since that moment, the U.S. has endured several higher-than-expected inflation readings causing interest rates to spike to the highest levels since November.

This included the recent Q4 2022 Unit Labor Cost Numbers, which came in double expectations.

And if that were not enough, inflation across the pond rose to record levels causing global yields to rise. France, Spain, Germany and Italy all reported record inflation prompting markets to start pricing in more rate hikes ahead for the European Union.

The European Central Bank is now expected to raise their benchmark interest rate to 4%. It was not long ago where that interest rate was negative and as interest rates rise around the globe, it places upward pressure on our yields.

4%

Last Wednesday, the ISM Manufacturing Index was reported. And while the headline number was disappointing and shows the manufacturing sector contracting, the prices paid component or inflation reading was elevated. After several higher-than-expected inflation readings over the last few weeks, this report was enough to push rates higher, with the 10-year yield breaking a psychological barrier at 4%. With this break above 4%, market watchers' sense that the November highs of 4.20% will be tested.

Fed Tough Talk Is Back

On the heels of the hotter than expected inflation numbers, Federal Reserve officials were out in full force, reminding markets that interest rates will go higher for longer. Fed President Kashkari said, "If we declare victory too soon, there will be a flood of exuberance and we will need to do even more work (rate hikes)."

The financial markets are now pricing .25 basis point rate hikes in March, May, and June, lifting the Fed Funds Rate to over 5% for the first time since 2007.

The good news? The Fed's efforts to fight inflation, slow demand create some unemployment and lower asset prices is good for long-term bonds like the 10-year Note and Mortgage-Backed Securities (MBS). We will now watch carefully to see if MBS prices can remain above the November price lows and if the 10-year yield can remain beneath the closing peak of 4.20% last seen in November.

Bottom line: In the absence of market-moving economic data we should not expect any meaningful improvement in rates. The good news is the cure for higher rates is higher rates. Rates are near peaks seen in the Fall. The economy is slowing and all of the Fed rate hikes from last year have yet to hit the economy.

This Week in Review: Three Things That Happened Last Week

Last week, rates touched the highest levels since Fall. Let's walk through three things that happened and what to watch in the week ahead.

1.) Fed Meeting Minutes Released

Last Wednesday, the Minutes from the February 1st Fed Meeting were released. At that meeting, the Fed raised rates by .25% and in the following press conference, Fed Chair Powell said, "The disinflation process has started and that's a good thing." The smaller rate hike and disinflation reference were bond friendly at that time and led to the lowest rates since September.

Fast forward to today, the markets were on edge heading into the Minutes as we have since seen a surprisingly strong Jobs Report for January and a higher-than-expected inflation number, both of which lifted Fed rate hike expectations and mortgage rates.

The Fed Minutes ended up not mentioning disinflation whatsoever, but acknowledged prices have declined, but they need to see more progress (lower prices). Moreover, some Fed Members said there is an elevated threat of a recession in 2023. After the dust settled, rates remained elevated but stable.

2.) Inflation Rising Abroad

In Europe, Core inflation (ex food and energy) for January was revised higher to 5.3%. This now puts pressure on the European Central Bank to raise rates more aggressively like our Federal Reserve did last year with its string of .75% rate hikes. There is speculation the ECB will raise rates from the current 2.5% to 3.75% by September.

Why is this important to us? The bond market is global. If rates rise in other big bond markets like Europe, they increase here. The opposite is true. The markets will start watching to see if these economies slow materially because of the rate hikes. This would benefit long-term rates like mortgages. Currently, short-term rates are higher than long-term rates, which is generally a sign that economies are slowing, and the Fed must be careful not to hike rates too much and for too long.

3.) FHA Makes MIP Cut

The Department of Housing and Urban Development (HUD), through the Federal Housing Administration (FHA), announced a 30-basis point reduction to the annual mortgage insurance premiums (annual MIP) charged to homebuyers who obtain an FHA-insured mortgage. The premium will be reduced from 0.85% to 0.55% for most homebuyers seeking an FHA-insured mortgage, which could mean an estimated savings of $678 million for American families in aggregate by the end of 2023 alone. The reduction will benefit an estimated 850,000 borrowers over the coming year, saving these families an average of $800 annually.

Takeaway? This effort by the government to help with housing affordability should be applauded. This measure will help would-be homeowners.

Bottom line: We are revisiting the theme of 2022 where there was uncertainty and volatility about where inflation is headed, what the labor market will look like and what the Fed will do about it. Long-term rates still looked to have peaked, which is a good thing.