Unpredictable 2021 Actually Creates Mortgage Market Breakthrough

After last year’s events, no one prepared for an unpredictable 2021, too. Inflation continues to rise. Experts worry about the economic recovery. And the COVID-19 Delta variant spreads across unvaccinated regions of the United States.

Inflation Continues to Rise Throughout Unpredictable 2021

The latest data shows that inflation continually rises. Meanwhile, home sales rapidly recover across the country. However, the past few weeks saw little economic news. As a result, economic growth outlook remained stagnant. For the time being, many say the same regarding Fed policy.

Inflation Continues Its Epic Climb

The Fed favors the core PCE price index as its go-to inflation indicator. With the latest data reveal, core PCE shows that inflation continued its epic climb.

The Fed stated that their core PCE target is 2.0%. In May 2021, core PCE rose 3.4% higher than a year ago. This is slightly below the consensus forecast. However, core PCE jumped up from an annual rate of increase of 3.1% in April.

Conclusively, core PCE realized its highest annual rate since 1992. Economists expected readings of this magnitude throughout the recovery process. Ultimately, economists differ on whether higher inflation will be a temporary spike or persist for years.

Core Consumer Price Index Improves

The Consumer Price Index report came out. Analysts widely follow the Consumer Price Index (CPI). As a monthly inflation report, CPI looks at the price change for goods and services.

Core CPI excludes the volatile food and energy components. In May 2021, core CPI jumped 0.7% from April. This statistic exceeded the consensus forecast of just 0.5%. Core CPI realized large increases in prices used for cars and airline tickets. In addition, core CPI rose 3.8% higher than a year ago. This improved from April’s 3.0% annual rate of increase. Also, core CPI saw its highest reading since 1992.

Home Sales Face Rapid Recovery

Home sales rapidly recovered after last year’s partial economic shutdown. Subsequently, the current home sales pace exceeds expectations, remaining at high levels.

However, home sales saw several straight months of small declines from their peak a few months ago. Analysts primarily attribute this performance to a lack of home inventory in many regions. Overall, this is a persistent long-term problem for the United States housing market. Inventory levels dropped 21% from a year ago. Home inventory remains at just a 2.5-month supply nationally. A 2.5-month supply is notoriously below the 6-month supply (a healthy balance between buyers and sellers).

In May, existing home sales fell 1% from April. In doing so, home sales stayed 45% higher than a year ago during the pandemic. On a side note, the median existing-home price rose 24% higher than last year at this time. Conclusively, the median existing-home price hit a new record of $350,300.

New home sales also faced a tough month. In May, new home sales fell 6% from April to the lowest level since May of last year. In general, home supply dictates the pace of both new and existing sales.

Fed & ECB Adjust for Inflation Data

The next chapter of this unpredictable 2021 opened with the Fed surprising investors via their latest projection. This facilitated rising mortgage rates. Also, the Fed released an unexpectedly hawkish statement. On a related note, the European Central Bank’s statement contributed to a positive mortgage rate outcome.

Federal Funds Rate and Monthly Bond Purchases Remain the Same

As expected, the Fed did not change the federal funds rate, nor did it adjust the size of its monthly bond purchases. However, many officials changed their projections on the outlook for future monetary policy. The rapid economic improvement and resulting inflation rise fueled this change. In doing so, the Fed surprised investors.

Thirteen out of eighteen officials anticipate that the Fed will begin raising the federal funds rate before the end of 2023. This number soared upwards from just seven in the prior set of forecasts in March. Ultimately, this unexpected time frame shift for rate hikes caught investors off guard. Last year, loose monetary policy helped mortgage rates decline to record-low levels. Comparably, the news of tighter policy spiked an increase in mortgage rates.

Fed Official James Bullard’s Thoughts

The first Fed official to speak publicly after the meeting was James Bullard. His comments after the meeting also were more hawkish than expected. Bullard emphasized that the reopening of the economy has been stronger than he anticipated.

“If that’s what you think is going to happen, then by the time you get to the end of 2022, you’d already have two years of two-and-a-half to 3% inflation,” he said. “To me, that would meet our new framework where we said we’re going to allow inflation to run above target for some time, and from there we could bring inflation down to 2% over the subsequent horizon.”

However, he noted that with this comes increased inflationary pressures. Thus, the Fed may need to tighten sooner. He said that he thinks the first-rate hike possibly could take place by the end of 2022.

Informative Meeting of the European Central Bank Indicates the Best Mortgage Rate Outcome

An informative European Central Bank (ECB) meeting and Fed report indicated the best mortgage rate outcome heading into summer 2021. Despite a stronger than expected inflation report, investors focused elsewhere. During the meeting, the ECB made no policy changes. Conclusively, the lack of change reflects the best-case outcome for mortgage rates.

Simultaneously, the ECB made no mention of a specific time frame for starting to scale back its bond purchase program. For analysts, the meeting statement tone felt relatively dovish. Investors widely expect that the ECB tightens monetary policy rather than to loosen it. For now, holding steady exemplifies positive news.

Meanwhile, the Federal Reserve reported that household net worth at the end of the first quarter of 2021 soared 3.8% higher than at the end of 2020. Roughly $3.2 trillion of gains originated from stocks. Aside from stocks, $1.0 trillion stemmed from increased real estate values.

Retail Sales Met Overall Expectations in Unpredictable 2021

Before the Fed surprised investors, the monthly Retail Sales report was released. Overall, analysts viewed the Retail Sales report as the most significant economic data released recently. The report met expected levels. In conclusion, retail sales made little impact.

In May, retail sales fell 1.3% from April. This statistic dropped below the consensus forecast. However, analysts revised April results to be higher. This offset the May retail sales shortfall.

May’s retail sales decline does not reflect a drop in overall consumer spending. Rather, consumers shifted their spending habits. Spending habits transitioned from goods, which are included in retail sales, to services such as dining out and travel, which are not.

Labor Market Strength Despite Unpredictable 2021

Comprehensively, the informative ECB meeting, Federal Reserve report, core CPI, and JOLTS data indicate that the economy is rapidly improving. The JOLTS report measures job openings and labor turnover rates. That said, the latest data indicates that the labor market is tightening.

At the end of April 2021, job openings unexpectedly surged to 9.3 million. In conclusion, April job openings shattered the former record high.

Currently, there are more than two million higher job openings than there were in January 2020. Of course, the coronavirus pandemic occurred after January 2020. Ultimately, high levels of job openings reflect a strong labor market. However, this also displays companies’ inability to hire enough workers. Also, countless employees willingly left their jobs in April. Analysts consider this a sign of labor market strength. Usually, people quit only if they expect to find better opportunities.

Aside from the job gains spearheaded by the hospitality and leisure sectors, the Institute of Supply Management (ISM) remained at very high levels, as expected and the national manufacturing index rose to 61.2. Also, the national services index increased to a record high 64.0.

Levels above 50 indicate that the sectors are expanding. Of note, a large number of companies reported difficulties in hiring enough workers to keep up with growing demand.

Hospitality Job Gains

The labor report illustrated good hospitality job gains after a rough 2020. Overall, this continues to fuel hope in what’s quickly becoming a promising mortgage market. However, the job gains fell in line with current expectations. As a result, mortgage rates remained fairly unchanged. In May, the economy gained 559,000 jobs. Thus, May’s job gains fell a little below the consensus forecast of 650,000.

Not only were there good hospitality job gains, but the leisure sector also realized economic strength as well. Again, this is after the economic nightmare of 2020. When the coronavirus pandemic struck, both the hospitality and the leisure sectors saw limited activity.

Simultaneously, both sectors saw countless layoffs while the American economy spiraled. For now, it appears that the worst is over. The unemployment rate fell to 5.8%. In conclusion, this dropped slightly below the consensus of 5.9%. On the other hand, average hourly earnings rose 2.0% higher than a year ago. In addition, the most recent average hourly earnings jumped up from an annual rate of increase of 0.4% last month. Generally, analysts view average hourly earnings as an indicator of wage growth.

Economic Recovery Still in Progress

Even with another month of good hospitality job gains, the economy still has a long way to go. 2020 accounted for countless financial losses due to the global COVID-19 pandemic. While the economy faces a path to recovery, it has about seven million fewer jobs than it did early last year. Therefore, Fed officials desire to move slowly before tightening monetary policy.

Many states are still feeling the effects of recent workforce shortages, something specifically felt hard in the service industry which is seeing record numbers of workers quit. Many employers are beginning to get desperate for workers as job openings continue to rise—with openings rising to 9.3 million in April according to the Bureau of Labor Statistics.

Experts don’t exactly know the reasoning but there are many guesses from stagnant wages, lack of benefits, and people wanting a stronger work/life balance due to lifestyle changes from staying home or working from home during the COVID-19 pandemic.

COVID-19 Delta Variant Causes Worry in Unpredictable 2021

With COVID-19 cases and hospitalizations in non-vaccinated people rising, many experts are worried it could affect the positive growth seen in the economy and job market. Major cities are already considering implementing mask mandates with Los Angeles County already instituting an indoor mandate for all.

The COVID-19 Delta variant now accounts for 83% of all COVID-19 cases in the United States. Concerningly, a few areas of the country are becoming COVID-19 hotspots once again, according to the Mayo Clinic. Florida now leads the United States in COVID-19 cases. Experts are concerned about many different unvaccinated pockets across the country, mostly in the southern states such as Missouri, Florida, Arkansas, and Louisiana.

The amount of unvaccinated people could halt the return to work for many and stunt the economies’ continued bounce back from 2020.

Never miss an update throughout this unpredictable 2021. To receive by-the-minute updates on mortgage-backed securities, try MBSQuoteline free for 14 days.

All material Copyright © Ress No. 1, LTD (DBA MBSQuoteline) and may not be reproduced without permission. To learn more MBSQuoteline, please contact our mortgage-backed securities company at 800.627.1077 or info@mbsquoteline.com.