We had such a great response to last week’s article about HomeAlert.
Because of the great response, once a month, I will do a homeowners’ tip that will help you keep your real estate investments safe.
Deep dive into economic reports
Let’s take a deep dive into recent economic reports that have come out and how “experts predict” where we are going and why.
Due to inflation having mostly leveled down over the previous six months, interest rates have been able to “stop the bleeding,” but conflicting messages in the inflation statistics are preventing a faster decline.
The Consumer Price Index (CPI), the most anticipated inflation report, came in a little lower than the market anticipated but is still rather far from target levels.
The Producer Price Index concurred that runaway inflation is no longer a threat, which holds little weight since the PPI is not nearly as meaningful of a report.
In fact, prices at the producer level decreased last month for the first time since inflation began to spiral out of control in 2020.
The market and inflation
Unfortunately, the market is not really concerned about that kind of inflation.
The Fed claims it hasn’t seen enough evidence of a decline to justify easing up on rates, despite the fact that “core services” inflation is currently all the rage.
Yet, that hasn’t stopped the market from searching for any indication that a decline of this magnitude might be imminent.
The price of maintaining a roof over one’s head has been one of the largest obstacles to service inflation. An Owners Equivalent Rent (OER) line item in the CPI keeps track of that. OER is off its peak levels but is still significantly higher than it should be, similar to the larger core CPI.
The inflation data is encouraging but not conclusive, so traders focus on other data that may provide insight into inflation tendencies.
Retail sales gains
Rates decreased significantly because of this at the beginning of the spate of bank failures in early March. Investors believed the turmoil in the banking industry would reduce demand and, consequently, inflation. This was supported by some early April statistics, which is why rates last week fell to their lowest levels in two months.
The jobs report released last week started to move things back in the other way (toward higher rates). By the end of the current week, Retail Sales presented a comparable argument… not that sales were really great. Contrary to expectations, overall retail sales actually declined by 1% instead of by 0.4%.
The problem is that investors expected consumers to reduce their spending even more quickly.
Particularly striking was the persistence in some of the more detailed data, such as the “non-store sales” component, which includes almost all online purchases.
This data demonstrates that consumers have put together three very solid months at a time when the economy is supposed to be slowing. In fact, in the 20 years prior to the pandemic, there were just three other instances of a comparable quarter.
In other words, investors looking for signs of a frightened consumer would have to seek elsewhere or wait for the next report.
Treasury yield “hit a wall”
This insight was immediately reflected in the bond market, particularly in the shape of expectations for a Fed rate hike.
Since December, the 10-year Treasury yield has hit a wall in its attempt to break below 3.4%.
While short-term bonds show the strongest correlation with Fed rate expectations, long-term bonds (which are more highly linked to mortgage rates) also experienced a setback. Despite some optimism surrounding last week’s progress, this week appears to have different ideas.
Between the lofty interest rates of late 2018, and the highest post-pandemic rate range lies an inflection point that commands respect. Paying heed to these levels is only logical.
The mortgage market is facing its own set of challenges. The Federal Reserve, which was previously the primary purchaser of fresh mortgage debt in the market, has now pulled out.
Quantitative tightening
This occurred through a process called quantitative tightening, which took place during the initial eight months of 2022.
As a result, the correlation between mortgage rates and Treasury yields has been dramatically altered. While the gap between the two still remains fairly wide relative to recent benchmarks, it is unlikely to revert back to its previous state as the Fed is no longer in the picture.
Bank earnings and comments from Fed speakers may generate some disruption for markets next week, despite a lack of impactful economic reports. Fortunately, we’re probably in the clear regarding the most alarming rates unless unexpected inflation arises.
Nevertheless, rates will likely find it arduous to drop much lower than the week before unless consumer behavior or inflation patterns change more definitively.
If you would like to discuss a strategy for buying or selling your home in this shifting market, please don’t hesitate to call, text, or email me today! (619) 568-0568. I am here with expert advice to help you avoid buyer fatigue and navigate the market.
