Latest inflation data continued to provide hopes that the Fed could begin cutting rates in the near term. The financial market has been reacting positively to the good news and consequently led to mortgage rates dropping more than 30 basis points since early July. With rates trending down in recent weeks, the housing market is seeing more buyers and sellers reentering the market. The momentum could continue if rates begin declining more consistently, and July could become the turning point of a strong second half for the housing market.

Inflation reaches the lowest level in more than three years: A drop in energy prices and a modest increase in food prices led to the first monthly decline in the consumer price index (CPI) since May 2020. The June headline CPI declined 0.1% from the prior month and was up 3% from the same month last year. Excluding energy and food prices, the core CPI rose 0.1% from May and 3.3% from a year ago. Both measures exceeded expectations and recorded the smallest gains since more than three years ago. The slowdown in inflation was broad-based, with core goods prices down once again while core services prices up only 0.1%. The latest inflation data could be one of the most encouraging reports since the Fed first started fighting inflation and might have put the central bank one step closer to reducing the fed funds rate in its September FOMC meeting.

Consumers lower expectation for inflation and home price growth: Consumers expectations on inflation a year from now dipped at the short- and the long-term horizons in June, but up slightly at the medium-term horizon, according to the latest New York Fed’s Survey of Consumer Expectations. At both the one-year horizon and the five-year horizon, the median inflation expectation recorded a 0.2 percentage point drop from the prior month to 3.0% and 2.8%, respectively. On the other hand, the median three-year ahead inflation expectation gained 0.1 percentage points to 2.9% last month. Consumers also expected home price growth to soften in the next 12 months, with the year-over-year change in price projected to decline to 3.0% in June from 3.3% recorded in May. As interest rates are expected to decline gradually in the next 18 months and housing supply is likely to continue loosening up this year and next year, home prices will continue to grow but at a more moderate pace in 2025.

Mortgage rates reach the lowest level since February: Weaker jobs reports and cooler-than expected inflation data in the past couple of weeks continued to fuel speculations that the first Fed’s rate cut is getting closer and closer as the economy moved into the second half of the year. Interest rates have been declining since the beginning of July and its winning streak had been extended to eighth straight day as of July 15, according to Mortgage News Daily. At 6.81%, the average 30 year Fixed-Rate Mortgage (FRM) reached the lowest level in five months in the mid of July. While the underlying bond market is beginning to exhibit signs of pulling back and rates could inch back up in the coming days, rates could begin declining in a sustainable fashionable if more signals of economic weakness are being observed in the third quarter.

Small business optimism inches up but Main Street remains pessimistic: The sentiment of small business owners improved slightly last month, but their outlook remained dim as the economic momentum slowed down. The NFIB Small Business Optimism Index climbed again for the third consecutive month from 90.5 in May to 91.5 in June. While the index has reached the highest level of the year, uncertainty about the economic outlook and the presidential election continued to weigh heavily on smaller firms and kept the index below its 50-year average of 98. Inflation remained the top concern for small business owners, as 21% of them reported inflation as the single most important problem in operating their business. Weakening demand in sales activity was also evident in the latest figures, as the net percent of business owners who reported greater sales in the past three months declined compared to last year’s level and the measure had been down year-over-year every month this year. Higher interest rates and retreating labor demand were also contributing factors to the pessimism despite the latest improvement.

U.S. foreclosures down in the first half of 2024: Foreclosure filings on U.S. properties decreased in the first half of 2024 to 177,431, a decline of 4.4% from the same time period a year ago and a drop of 40.1% from the first six month in 2019, according to ATTOM. Foreclosure activity in the first half of this year was also well below the Great Recession level, with filings in 2024 down 89.2% from the peak of 1.65 million in 2010. The 177k plus properties with foreclosure filings represented 0.13% of all U.S. housing units, unchanged from the level recorded in in 2023, but a dip from 0.22% in 2019. For the month of June, 18,574 properties in the U.S. started the foreclosure process, a drop of 17% from the prior month, and a decline of 22.7% from the same month in 2023. Nationwide, one in every 5,071 properties had a foreclosure filing last month. At the state level, California had 19,013 foreclosure filings in the first six months in 2024, an increase of 6.13% from 17,914 reported in 2023. With home prices reaching record-high levels in the first half of 2024 and the labor market remaining solid this year, foreclosure activity is not expected to increase sharply in the next 12 months.

Mortgage rates rose further two weeks ago as the latest macroeconomic report shows that the U.S. economy continued to grow moderately with inflation remaining sticky and declining slower than expected. Despite being in an environment where rates stay higher for longer, there are signs that suggest that housing consumers are gradually adjusting to the new normal. New home sales bouncing back strongly in March, for example, is an indication that homebuyers still want to buy if they could find a way to get back into the market.

New home sales have the strongest pace in six months: New home sales in the U.S. bounced back in March after a brief retreat in February, with the number of newly constructed single-family houses sold rising 8.8% month-over-month and surging 8.3% year-over-year. Last month’s sales were the strongest sales pace since September 2023. With interest rates back on a rising trend since mid-March, more homebuyers turned to the new home market as many builders were still offering price discounts, mortgage rate buy-downs, and other incentives to offset the eroding housing affordability conditions. Ample inventory in the new home market was another reason for the increase in sales of newly constructed homes. The supply of new homes continued to rise and reached the highest level since February 2021, with the count of housing units for sale climbing to 477,000 in March, an increase of 10.2% from the same month last year. The March inventory level is equivalent to a supply of 8.3 months and remains well above the historical average of 5.9 months. Meanwhile, prices for new homes in March inched up from February but declined from a year ago. The national median price dropped 1.9% year-over-year to $430,700.

Mortgage delinquency rate falls from a year ago: Mortgage delinquency at the national level dipped on a year-over-year basis for the first time in six months, according to the latest Loan Performance Insights released by CoreLogic. Mortgages that were late in payment by at least 30 days or more dropped 0.2 percentage points from 3.0% in February 2023 to 2.8% in February 2024. The share of mortgages that were past due for six months or more reached the lowest level in 15 years. Almost all stages of delinquency were at near record lows in February and only four states reported year-over-year increases in overall delinquency rates, while eight states remained unchanged from a year ago. With home prices expected to rise further in coming months and the U.S. likely to avoid an economic downturn this year, the mortgage delinquency rate should maintain its stability throughout the rest of the year.

US economic growth slows in the first quarter: The U.S. economy continued to grow in the first three months of the year but at a pace slower than expected. The first quarter Gross Domestic Product (GDP) increased from the previous quarter by an annualized rate of 1.6%, a sharp decline from Q4 2023’s 3.4%, and was the weakest pace of growth since Q2 2022. A sharp pullback in exports, a decrease in inventory investment in the private sector, and a slowdown in government spending all contributed to the softening in growth in economic activity. Consumer spending, while still gaining at a healthy pace, also slowed to 2.5% in Q1 2024 from 3.3% in the prior quarter. Despite the slowdown in economic growth, inflation in Q1 2024 remained stubbornly high. The Personal Consumption expenditure (PCE) Deflator – a key inflation gauge preferred by the Federal Reserve – increased 3.4% in Q1 2024, the biggest gain in a year. The pick-up in inflation indicated by the latest GDP report likely reaffirms the Fed’s decision to hold the rate-cut movement for a little longer.

Saving rates down as spending outpaces income growth: As consumers spending remained resilient amid a sticky inflation environment, Americans continued to run down on their savings at the end of the first quarter. The personal saving rate in March 2024 declined on a month-over-month basis for the second straight month to 3.2%, the lowest since October 2022. It was also well below the roughly 7% share before the pandemic. With personal spending increasing monthly at 0.8% while personal income was only up 0.5% for the same time period, consumers were drawing more from their savings than they had in the past 17 months. As consumers continue to deplete their savings and cost of borrowing remains elevated, future declines in personal saving rate could put a drag on consumer spending growth, and the economy will likely slow in coming months if wage growth remains stagnant or begins to decline.

Rates could fluctuate as the market waits for a Fed’s Update: Mortgage rates reached the highest levels since late November as recent economic reports indicate that inflation has remained stubbornly high in the past couple of months. The average 30 year fixed-rate mortgage reached its recent bottom in mid-January but has since climbed more than 50 bps in the last three months. The 10-year Treasury yield had been rising and hit the highest level in five months last Wednesday before easing back down in the last two days. Interest rate volatility will likely remain for the rest of the week as the market speculates on the Fed’s next policy rate’s move and its outlook on future rate cuts.

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Selena Young
Realtor | Coldwell Banker Realty
DRE# 02073411