Your Guide to the July Mortgage Market: Key Highlights and Insights

The U.S. economy has demonstrated resilience in the face of rising interest rates, growing at its long-run average rate of 2% during the first quarter of 2023. The labor market remains robust, with unemployment below 4% and an increase in labor force participation for the 25–54-year-old age group. However, the housing market has been impacted by high rates, with many homeowners locked into previously low mortgage rates, leading to low inventory levels and favoring home sellers over buyers in most markets. This “mortgage rate lock-in effect” is the largest ever recorded in U.S. history and is expected to influence the housing market for years to come.

The economy’s recent developments show a positive outlook, with real GDP growth continuing, albeit at a slower pace due to interest rate-sensitive sectors. Consumer confidence is high, and inflation has been cooling in recent months. The labor market has shown strength, with job additions and a low unemployment rate.

In the housing market, the divergence between existing home sales and new home sales has widened. Existing home sales have declined, while new home sales have increased. The mortgage rate lock-in effect has led many existing homeowners to be reluctant to list their homes for sale, contributing to low inventory levels. Builder confidence has improved due to strong housing demand, easing supply chain issues, and fewer existing homes for sale. Housing starts and permits have increased, but home prices may continue to rise due to tight inventory.

Regarding mortgage market performance, mortgage rates settled at 6.7% in June, leading to increased purchase applications. Delinquency rates have decreased, and foreclosure starts are below 2019 levels.

Looking ahead, the outlook remains volatile, with the Federal Reserve’s pause on interest rate hikes providing some relief to the economy. Consumers’ spending and savings behavior will play a crucial role in economic growth, and inflation is expected to continue cooling gradually. Mortgage rates are likely to remain above 6% for the second half of 2023, impacting home sales and purchase origination volumes.

The mortgage rate lock-in effect has significant implications for the U.S. economy, as many homeowners have locked in significant savings with their fixed-rate mortgages. This effect has contributed to the shortage of available-for-sale inventory in the housing market, posing challenges to the industry. The impact of this effect will continue to be studied and monitored.

Here are the key highlights from last week’s significant events:

  1. Fed Rate Hike: The Federal Reserve raised its benchmark Fed Funds Rate by 25 basis points to a range of 5.25% to 5.5%. This marked the eleventh rate hike since March of the previous year. The next meeting in September remains uncertain for another rate increase, as Fed Chair Jerome Powell hinted at a possible pause. Economic data, including GDP growth and jobless claims, will play a crucial role in the Fed’s decision-making process.
  2. Cooling Inflation: June’s Personal Consumption Expenditures (PCE) report indicated a decline in headline inflation from 3.8% to 3% and core PCE inflation from 4.6% to 4.1%. Although inflation remains elevated, the recent improvement from its peak last year is welcome news. Lower inflation could positively affect mortgage bonds and mortgage rates over time.
  3. Critical Housing Supply: Pending home sales rose 0.3% from May to June but were down nearly 16% from the previous year, primarily due to low housing inventory. The National Association of Realtors® emphasized that increasing homebuilding and supply are essential to meet the demand for housing.
  4. Heightened Demand for New Homes: New home sales fell 2.5% from May to June but increased significantly compared to the previous year. The shortage of existing homes for sale is driving demand for new homes, but the supply of new construction remains insufficient. This dynamic is supporting home prices and making homeownership a valuable investment opportunity.
  5. Rising Home Prices: The Case-Shiller Home Price Index showed that home prices nationwide rose 0.7% from April to May, marking the fourth consecutive month of accelerating gains. While prices were lower than May 2022 levels, the upward trend indicates a robust recovery in home prices.

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What to Look for This Week: Keep an eye out for important updates on the labor sector, including the JOLTS report for June, ADP’s employment report for July, and the July jobs report, which includes non-farm payrolls and the unemployment rate.

Technical Picture: Mortgage bonds tested resistance at 99.234 and have potential for further upside. The 10-year Treasury yield is back below 4% and may continue to move lower towards support at 3.90%.