MBS Road Signs 10-4-21

The last week of September was jam-packed with news on housing, inflation, and jobless claims.

The Case-Shiller Home Price Index showed that prices rose 1.6% from June to July and they were up a record 20% annually. The Federal Housing Finance Agency (FHFA), which measures home price appreciation on single-family homes with conforming loan amounts, also showed strong appreciation. Home prices rose 1.4% from June to July and 19% year over year.

Rents are also rising at a feverish pace. Apartment List reported that rents rose 2.1% in September and 16.4% year to date, up from 13.8% in the previous report. This is the fastest rent growth on record and is on a 22% pace if these increases continue.

However, there was some good news for buyers who have been struggling with low inventory. Pending Home Sales, which measure signed contracts on existing homes, came in much stronger than expectations, jumping 8% from July to August. NAR’s Chief Economist, Lawrence Yun, noted that rising inventory and less pricing pressure accounted for the surge.

The latest Personal Consumption Expenditures (PCE) report showed that consumer inflation was up 0.4% in August, which was slightly hotter than expectations. Year over year the index rose from 4.2% to 4.3%, which is the hottest reading in 30 years. Core PCE, which strips out volatile food and energy prices and is the Fed’s real focus, was up 0.3% in August while the year-over-year reading remained at 3.6%.

Rising inflation is always critical to monitor because it can have a big impact on Mortgage Bonds and home loan rates, which are tied to them. While the PCE figures may appear to suggest that consumer inflation is holding steady, it’s important to look further into the data. Don’t miss our analysis below.

Initial Jobless Claims moved in the wrong direction in the latest week, as the number of people filing for unemployment for the first time rose by 11,000 to 362,000. However, the number of people continuing to receive regular benefits did decline. Yet, the real story is that the federal COVID plans, including the Pandemic Unemployment Assistance and Emergency Claims, fell by 6.5 million as those plans expired. There are now 5 million people in total receiving benefits, which is down over 6 million from the previous report.

And of note, the final reading of second-quarter Gross Domestic Product (GDP) showed 6.7% growth on an annualized basis. This was slightly better than expectations and an increase from 6.6% in the previous reading. And changes are coming to the Fed, as both Boston Fed President, Eric Rosengren, and Dallas Fed President, Robert Kaplan, announced their retirement

Home Price Appreciation Hits Another Record High

The Case-Shiller Home Price Index, which is considered the “gold standard” for appreciation, showed home prices rose 1.6% in July and 20% year over year. This annual reading set another record high, beating June’s 18.6% record.

The 20-city index also rose 20% year over year, with all the cities showing strong gains. Phoenix (+32%), San Diego (+28%), and Seattle (+26%) continued to report the highest annual gains.

The Federal Housing Finance Agency (FHFA) also released their House Price Index, which measures home price appreciation on single-family homes with conforming loan amounts. While you can have a million-dollar home with a conforming loan amount, the report most likely represents lower-priced homes, where supply has been tight and demand strong.

Home prices rose 1.4% in July and they were also up 19% year over year. This is the first time in recent memory that we have seen FHFA’s data below Case Shiller’s.

This dynamic shift could mark the peak of year-over-year appreciation gains. While monthly appreciation gains are still expected to occur, they could start to slow and this would make the year-over-year figures start to come down a bit. It’s important to note this does not mean home prices are expected to decline because there is still too big of a crop of homebuyers for too few homes. But the pace of gains could slow.

Rents are also rising at a feverish pace. Apartment List reported that rents rose 2.1% in September and 16.4% year to date, up from 13.8% in the previous report. This is the fastest rent growth on record and is on a 22% pace if these increases continue. To put this into context, rents from January 2017 to September 2019 averaged just a 3.4% rise. In addition, only a few cities remain cheaper than they were pre-pandemic, while 22 cities have increased more than 25% from the start of the pandemic

Pending Home Sales Surge in August

Pending Home Sales, which measure signed contracts on existing homes, jumped 8% in August, the National Association of Realtors (NAR) reported. This was much stronger than estimates of 1%.

Contracts are 8% lower compared to August of last year, though this is still pretty good considering the lack of inventory and tough comparisons to last year’s data.

NAR’s Chief Economist, Lawrence Yun, noted that rising inventory and less pricing pressure is accounting for the surge. Given the strong demand for housing the simple fact remains that if there were more homes for sale, there would be more sales.

What’s Ahead For Inflation?

The Fed’s favored measure of inflation, Personal Consumption Expenditures (PCE), showed that headline inflation was up 0.4% in August, which was slightly hotter than expectations. Year over year the index rose from 4.2% to 4.3%, which is the hottest reading in 30 years.

Core PCE, which strips out volatile food and energy prices and is the Fed’s real focus, was up 0.3% in August while the year-over-year reading remained at 3.6%.

Remember that the year over year figures are calculated on a 12-month rolling basis. This means that in last Friday’s report, the August 2020 reading of 0.3% for Core PCE was replaced with the August 2021 reading, which was also 0.3%. This is why the year-over-year reading remained the same from the previous report.

Yet, when we look ahead to the next three reports, here are the figures we will be replacing. The September 2020 reading of 0.1% will be replaced with data for September 2021 when it is reported on October 29. The October 2020 reading of 0.0% will be replaced with data for October 2021 when it is reported on November 24. And the November 2020 reading of 0.0% will be replaced with data for November 2021 when it is reported on December 23.

This means if we continue to see monthly readings of 0.3%, we would see the year over year Core PCE reading climb by 0.8% to somewhere around 4.2% or 4.3%, depending on rounding. The bottom line is that inflation does not appear to be as transitory as the Fed would like.

On that note, 224 S&P 500 companies mentioned inflation in their second quarter calls. And last Wednesday, Fed Chair Jerome Powell changed his tune a bit, saying that he still expects inflation to ease eventually, but that the current pressures are going to run into 2022.

Rising inflation is always important to note since inflation erodes a Bond's fixed rate of return. In other words, rising inflation can cause Bonds to worsen or lose value. This includes Mortgage Bonds, to which home loan rates are inversely tied. When Mortgage Bonds move lower, be it due to rising inflation or other reasons, home loan rates can move higher. Though many factors influence the markets, inflation remains crucial to monitor in the months ahead.

Impact of the Expiring Pandemic Jobless Claim Programs

Initial Jobless Claims moved in the wrong direction in the latest week, as the number of people filing for unemployment for the first time rose by 11,000 to 362,000. However, the number of people continuing to receive regular benefits did decline by 18,000 to 2.8 million.

Yet, the real story is that the federal COVID plans, including the Pandemic Unemployment Assistance and Emergency Claims, fell by 6.5 million as those plans expired.

There are now 5 million people in total receiving benefits, which is down over 6 million from the previous report.

What to Look for This Week

We'll get more news on home price appreciation when CoreLogic releases its Home Price Index report for August on Tuesday.

Then all eyes will be on the labor sector beginning Wednesday when the ADP Employment Report will give us an update on private payrolls for September. Thursday brings the latest Initial Jobless Claims data, as usual. Then ending the week on Friday, the highly anticipated Bureau of Labor Statistics Jobs Report for September will be released, which includes Non-farm Payrolls and the Unemployment Rate.

Technical Picture

Mortgage Bonds continued their rally on Friday, breaking above the 103.367 ceiling. They have a little more upside potential before reaching resistance at the 103.487 Fibonacci level. The 10-year has moved lower and is currently trading around 1.47%. There is some room for the downside until reaching the 100-day Moving Average at 1.40%.