Newsletter - 9/23/2024

Week of September 16, 2024 in Review

The Fed started its rate-cutting cycle with an aggressive move, while housing construction ramped up in August due in large part to lower mortgage rates. Here are the headlines:

-Fed Cuts Rates 50 Basis Points

-Existing Home Sales Slip

-Home Builder Confidence Rises After 4-Month Skid

-August Sees Surge in Single-family Home Building

-Surprise Gain for Retail Sales

-Continuing Jobless Claims Reflect Hiring Slowdown

Fed Cuts Rates 50 Basis Points

The Fed’s new easing cycle began last week, as they cut their benchmark Federal Funds Rate by 50 basis points, bringing it to a new range of 4.75% to 5%. This decision was not unanimous, however, as Fed Governor Michelle Bowman wanted a less aggressive 25 basis point cut.??

The Fed Funds Rate is the interest rate for overnight borrowing for banks and it is not the same as mortgage rates. The Fed began aggressively hiking the Fed Funds Rate in March 2022 to try to slow the economy and curb the runaway inflation that became rampant after the pandemic. More recently, cooling consumer inflation and rising unemployment caused the Fed to acknowledge that “the time has come for policy to adjust.”?

What’s the bottom line? The Fed is trying to ease interest rates to keep the economy from entering a recession, and they’re currently forecasting another half percentage cut by the end of this year, and an additional one percentage cut in 2025. However, these forecasts may change, in either direction, as economic data presents itself.?

In addition, it’s important to remember that mortgage rates may not directly follow the Fed Funds Rate or move in similar increments. But if the overall interest rate environment is moving lower, that’s typically a good sign for mortgage rates.

Existing Home Sales Slip

Existing Home Sales were weaker than estimates per the National Association of REALTORS? (NAR), as August’s transactions were down 2.5% from July and 4.2% from a year ago. This report measures closings on existing homes in August and likely reflects people shopping for homes in June and July, before rates made their latest leg lower.

What’s the bottom line? While the number of closings declined in August, some of the internals within the report point to the demand that’s out there. Homes remained on the market for an average of 26 days in August, while almost a quarter of homes (24%) sold above list price. Lower mortgage rates are also expected to spur activity in the coming months.

Regarding inventory, there were 1.35 million homes available for sale at the end of August, up 0.7% from July and 22.7% from a year earlier. While this sounds like a big jump, the rise is from very low numbers and inventory remains well below pre-pandemic levels. The pent-up demand for homes combined with ongoing tight supply continues to bode well for housing as an investment and continued home price appreciation over time.

Home Builder Confidence Rises After 4-Month Skid

Falling mortgage rates have led to an improvement in home builder sentiment. The National Association of Home Builders (NAHB) reported that their Housing Market Index increased two points to 41 in September. However, sentiment remains in contraction territory below the key breakeven threshold of 50.?

What’s the bottom line? While builders are still pessimistic, we saw improvement in all three index components (buyer traffic, current and future sales expectations). Of note, the index measuring future expectations jumped 4 points back into expansion territory above 50. NAHB Chair, Carl Harris, explained, “Thanks to lower interest rates, builders now have a positive view for future new home sales for the first time since May 2024.”

August Sees Surge in Single-family Homebuilding

After a disappointing July, Housing Starts rose 9.6% from July to August, hitting their fastest pace since April. Starts for single-family homes, which are especially crucial due to buyer demand, were also higher with a whopping 15.8% rise. There was a similar trend in future construction, with Building Permits moving higher from July to August for both single-family and multi-family homes.?

What’s the bottom line? New home construction rebounded in August, led by the huge boost in single-family home construction. Building Permits, a sign of future construction, also hit a 5-month high. Again, this increase in permits shows that builders feel more confident about the future thanks to lower interest rates.

Surprise Gain for Retail Sales

Retail Sales rose 0.1% in August, above the 0.2% decline the market was expecting. Sales in July were also revised higher to 1.1%, which may have been due in part to Amazon Prime Day, where we saw $14.2 billion in sales. The Core reading, which gets plugged into GDP, rose 0.3% while July’s reading was also revised higher by a tenth to 0.4%.

What’s the bottom line? Overall, the sales figures for August show that consumer spending remains resilient even as hiring has shown signs of slowing. Plus, the better-than-expected Core reading may lead to stronger GDP estimates down the line.

Continuing Jobless Claims Reflect Hiring Slowdown

Initial Jobless Claims fell by 12,000 in the latest week, with 219,000 people filing for unemployment benefits for the first time. Continuing Claims also declined by 14,000, as 1.829 million people are still receiving benefits after filing their initial claim.

What’s the bottom line? Continuing Claims have now topped 1.8 million for 15 straight weeks, remaining near highs from November 2021. And while Continuing Claims have fallen over the last few weeks, this likely encompasses benefits expiring as well as people finding new jobs, given that the hiring rate (3.5%) is near the lowest level since 2013 not including COVID.

Family Hack of the Week

September 26 is National Pancake Day and these Blueberry Buttermilk Pancakes courtesy of the Food Network are equal parts light, fluffy and delicious. Yields 4 to 6 servings.

In a large bowl, sift together 2 cups all-purpose flour, 1/4 cup sugar, 1/2 teaspoon baking powder, 1/2 teaspoon baking soda and 1/2 teaspoon salt. In a separate bowl, beat 2 eggs with 2 cups buttermilk and 1/4 cup melted unsalted butter. Combine wet and dry ingredients into a lumpy batter; do not overmix!

Heat some butter in a skillet over medium heat. Spoon 1/3 cup batter into the skillet and sprinkle the top with blueberries. Cook for 2 to 3 minutes on each side. Serve with a dollop of whipped cream and your favorite maple syrup.

What to Look for This Week?

Look for more housing news, starting with appreciation data for July from Case-Shiller and the Federal Housing Finance Agency on Tuesday. August’s New and Pending Home Sales will be reported on Wednesday and Thursday, respectively.

Also on Thursday, we’ll see the final reading on second quarter GDP and the latest Jobless Claims. Friday brings the most crucial report of the week via the Fed’s favored inflation measure, Personal Consumption Expenditures.?

Technical Picture

Mortgage Bonds tested the 101.52 ceiling on Friday, which has proven to be a tough level of resistance. The 10-year ended last week trading at around 3.74%, just beneath its 25-day Moving Average. This is an important level to remain under, as the next ceiling higher is 3.92%.