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The sharp increase in mortgage rates in the past month was due primarily to the Fed’s announcement at their latest FOMC meeting that rates will be kept “higher for longer”, which dashed market participants’ hope for more significant rate cuts in 2024. Despite the initial increase, rates have shown improvements last week as several Fed’s speakers softened their tones and suggested that the Central Bank could be done with rate hikes. Housing sentiment, nevertheless, declined further last month as consumers pointed to mortgage rates as their primary challenges to housing affordability. With costs of borrowing staying high and rates likely to fluctuate in the next couple of weeks, home sales will remain soft in the near term.
Core inflation continues to moderate but at a slow pace: Consumer prices rose more than expected with the headline inflation increasing 0.4% month-over-month and 3.7% year-over- year in September. Energy prices, while moderated last month, continued to put upward pressure on overall inflation. The retreat in retail price at the gas pump since the end of September, however, will provide some relief to consumers in the near term and should help ease the inflationary pressure in October. The Core Consumer Price Index (core CPI) – inflation excluding food and energy – continued to fall in September, with the index rising 0.3% from the prior month and was up 4.1% from a year ago. The core index in September suggests that inflation remains on a downward trend, but the improvement made has been slow and will likely remain slow in the next couple of months. While the latest CPI report provides some insights on the recent progress on inflation, the Fed will be looking for more evidence in the next few weeks to prove that the economy is indeed slowing before putting the rate-hike movement on hold in their November meeting.
Mortgage rates back to recent highs after making progress last week: Mortgage rates dropped sharply early last week following the outbreak of the Israel-Hamas conflict. Additionally, comments from several Fed speakers made last week also suggested that the Fed could be done with rate hikes as most of the work on inflation has already been done. The average 30-year fixed rate mortgage (FRM) went down 15 bps by Friday when compared to the Friday of the prior week, according to Mortgage News Daily. The improvement made on rates, however, was almost completely erased at the start of the current week, as yields surged on Monday. With the yield on the 10-year Treasury rising 8 basis points (bps) on Monday and the 2-year Treasury yield traded almost 5bps higher, the average 30-year FRM increased 14 bps on the first day of the week. As investors continue to assess the economic outlook and the uncertainty brought on by the geopolitical tension in the Middle East, more volatility on rates should be expected in the short term.
Elevated mortgage rates keep housing sentiment at a low level: Housing sentiment decreased further in September as rates climbed to a 23-year high, reported by Fannie Mae in their latest national housing survey. Those who believed that it is a good time to buy dipped to 16%, reaching the all-time survey low set last year. With rates rising more than 50 bps since a month ago and having been trending up for nearly six months, consumers remained downbeat about home buying conditions with only 17% expected mortgage rates to decline in the next 12 months. High mortgage rates, in fact, have surpassed high home prices as the top reason why consumers think it is a bad time to buy a home. On the sell side, while consumers were more upbeat with 63% reported that it is a good time to sell, it was, nevertheless, still a decline of three percentage points compared to the prior month.
CEO confidence dips as future expectations become more pessimistic: Business executives remained cautious about the economic outlook at the beginning of Q4, as nearly half (47%) of them expected general economic conditions to get worse over the next six months. Compared to the prior quarter, CEOs were less enthusiastic about the economy ahead, as only 39% in the third quarter thought the same way. Political uncertainty, geopolitical instability, inflation stickiness, and higher costs of borrowing are just a few concerns that might have resulted in the decline in business leaders’ optimism. Despite the slight decline in the CEOs confidence, 38% of CEOs still expected to expand their workforce over the next 12 months, an inch down from 40% in Q3. Over a quarter (27%) of them expect to increase their capital budgets, up from 22% in the last quarter. The majority of CEOs continued to expect a recession in the next 12-18 months, but that consensus declined noticeably over the course of 2023. In Q4, less than three-quarters (72%) of them believed that there will be a recession in the next 12-18 months, a drop from 93% at the start of the year.
Share of first-time buyers bounced back after two years of decline: The share of homes being sold to first-time buyers increased from 33.7% in 2022 to 36.2% in 2023, according to the California Association of Realtors 2023 Housing Market Survey. The increase in the first-time buyer share this year, however, was not attributable to housing being more affordable. Rather, the rise in share was due primarily to fewer repeat buyers entering the market as many of them were also homeowners who were not willingly to put their house up on the market for sale due to the lock-in effect.
