What Happened Last week to Affect Mortgage Rates?

Consumer Spending Surges

It was a volatile week for mortgage markets, mostly due to shifting expectations for Russian military action in Ukraine. The daily movements were offsetting, however, and mortgage rates ended the week with little change, remaining at the highest levels since the middle of 2019.

In response to geopolitical events such as a possible Russian invasion of Ukraine, investors generally seek to reduce the level of risk in their portfolios. Last week, news which indicated a greater chance of Russian military action caused investors to shift from stocks to relatively safer assets such as bonds. This increased demand for mortgage-backed securities (MBS), which was favorable for mortgage rates. News which hinted at reduced tensions had the opposite effect.

Since consumer spending accounts for over two-thirds of US economic activity, it is an important indicator of the health of the economy. In January, retail sales jumped 3.8% from December, far above the consensus forecast for an increase of 2.0%. The gains were seen in a broad-based range of products, particularly in vehicles, furniture, and building materials.

After unexpectedly dropping in December, sales of existing homes jumped 7% in January, far above the consensus forecast for just a slight increase. Inventory levels in January were down 17% from a year ago, at just a 1.6-month supply nationally, well below the 6-month supply which is considered a healthy balance between buyers and sellers, and a record low level. The median existing-home price was 15% higher than last year at this time at $350,300.

With the shortage of available homes in many areas, investors have been closely watching the monthly reports on housing starts, and the most recent data contained mixed results. In January, housing starts unexpectedly decreased 4% from December. However, building permits, a leading indicator of future activity, unexpectedly beat the consensus forecast, rising to the highest level since 2006. Higher prices and shortages for land, materials, and skilled labor remained obstacles to a faster pace of construction.

Looking ahead, investors will closely follow news on Ukraine and will look for additional Fed guidance on the pace of future rate hikes and balance sheet reduction. Beyond that, New Home Sales will be released on Thursday. The core PCE price index, the inflation indicator favored by the Fed, will be released on Friday. Mortgage markets will be closed on Monday in observance of Presidents Day.

Weekly Change

10yr Treasury flat 0.00

Dow fell 500

NASDAQ fell 200

Calendar

Thu 2/24 New Home Sales

Fri 2/25 Core PCE

Fri 2/25 Personal Income

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