May 2022 Mortgage Market: Rates Plummet with Limited Activity

Taking a look back at the May 2022 mortgage market, investor expectations stabilized to some degree. Although inflation continued its persistent rise, investors gained a clearer understanding of where it is headed. Moreover, the Federal Reserve began taking concrete steps to reobtain control over rising prices.

Along that note, the Federal Reserve proceeded with its plans. Noticeably, the Federal Reserve raised the federal funds rate by 50-basis points in May. With this action, investors finally feel at home pricewise in the landscape of higher inflation. The move towards tightening monetary policy helped to assure this.

As the economy steadily recovered from the pandemic, strong consumer demand, supply constraints, and surging commodity prices pushed prices much higher for a wide range of goods and services. The conflict in Ukraine and the recent shutdowns in China due to Covid worsened shortages for many key items. Over time, supply chain disruptions will ease. More so, Federal Reserve tightening will reduce inflationary pressures. However, the timeline is still unclear.

This year, higher mortgage rates took a large toll on mortgage application volumes. According to the latest data from the Mortgage Bankers Association (MBA), average 30-year fixed rates jumped over 2.0% higher than a year ago. Holistically, purchase applications decreased 8% from last year at this time. On the other hand, refinance applications plunged a shocking 72% from one year ago. Now, the Mortgage Bankers Association forecasts a 35% decline in total mortgage originations by the end of 2022. After peaking early in May, mortgage rates ended the month a little lower.

Federal Reserve Tightening Monetary Policy Affects May 2022 Mortgage Markets

In an effort to help the economy recover from the pandemic, the Federal Reserve put in place extremely loose policy measures. With the recent surge in inflation, officials began tightening their approach to the United States’ economic policy. Ultimately, the Federal Reserve aims for a soft landing.

Essentially, a soft landing entails raising the federal funds rate just enough to lower inflation without inducing a full-fledged recession. Investors question whether increasing the federal funds rate back to just a “neutral” level will be sufficient to bring down inflation. Some officials noted in the minutes that raising rates even higher to a “restrictive” stance, which would slow the economy, may be appropriate depending on future financial conditions.

Federal Reserve Announces 50-Basis Point Federal Funds Rate Hike

As expected, the Federal Reserve raised the federal funds rate by 50-basis points. After discussing the possibility for months, they announced the rate hike at their meeting on May 5th, 2022. In addition, the Federal Reserve provided further details on its plan for managing its portfolio. Currently, the Federal Reserve holds a portfolio clocking in at a massive $9 trillion. Their financial portfolio is comprised of both Treasuries and mortgage-backed securities, also referred to as MBS.

Moving forward, the Federal Reserve plans to allow its bond holdings to decline by $47.5 billion per month, directly affecting the May 2022 mortgage market. This plan takes effect for the next three months. Following the initial three-month period, the Federal Reserve’s combined Treasury and bond portfolio will then decline by $95.0 billion monthly after. In conclusion, this outline falls close in line with investor expectations. Again, this outcome helps investors to feel at home with the Federal Reserve’s strategy for combatting inflation.

Plans for the Federal Reserve to Initiate 75-Basis Point Federal Funds Rate Hike

Worth noting, the media asked the Federal Reserve about future plans during the follow-up press conference. Someone asked whether the Federal Reserve might implement 75-basis point rate hikes at upcoming meetings. In response, Federal Reserve Chair Powell responded that this was not an option currently being considered. In hindsight, we all know that the 75-basis point rate hike did come to fruition at the June 2022 meeting. As a matter of fact, this became the largest federal funds rate hike since 1994.

Again, Federal Reserve Chair Powell stressed that restoring price stability is “an unconditional need.” He firmly stated that the Fed will not hesitate to raise the federal funds as high as needed to bring down inflation. Subsequently, Federal Reserve Chair Powell warned that this might lead to an increase in the unemployment rate. According to Powell, “there could be some pain involved” for the economy due to the monetary policy tightening.

PCE & CPI Impact on May 2022 Mortgage Market

Overall, the Federal Reserve favors the personal consumption expenditures price index as its go-to inflation indicator. Also referred to as PCE, the data from April 2022 showed that core PCE rose 4.9% higher than one year ago. Having said that, investors anticipated this outcome. Thus, the April core PCE matched investor and analyst expectations.

In addition, core PCE dropped down from 5.2% from the data in March 2022. For comparison, the annual rate of increase fell below 2.0% during the first three months of 2021. Now, investors wonder how quickly inflation will moderate considering global tensions. Specifically, investor attention falls towards the ongoing COVID-19 pandemic and the conflict between Russia and Ukraine.

Similar to the core PCE, analysts also watch for the Consumer Price Index (CPI). CPI looks at price changes for a broad range of goods and services. For this reason, analysts and investors rely on CPI as another inflation indicator. Core CPI excludes the volatile food and energy components. Also, core CPI provides a clearer picture of the longer-term trend.

In April 2022, Core CPI increased 6.2% higher than a year ago. However, this statistic declined from an annual rate of increase of 6.5% last month, the highest level since 1982. Having said that, core CPI remains far above the readings around 2.0% seen early in 2021.

Employment Report Shows Gains in Leisure & Hospitality

Similar to the core PCE report, the closely watched Employment report also came in right on target, supporting the May 2022 mortgage market. Against a consensus forecast of 400,000, the economy added 428,000 jobs in April 2022, as expected. Furthermore, the hospitality and leisure sectors witnessed the largest job gains. These two sectors faced major repercussions during the early days of the coronavirus pandemic. Optimistically, seeing these two sectors bounce back strongly bodes well for the country’s economic future.

Along that vein, the unemployment rate remained at 3.6%. Conclusively, the latest unemployment rate date signifies the lowest level since early 2020. Lastly, average hourly earnings increased an impressive 5.5% higher than a year ago. This number holds roughly the same annual rate compared to last month’s reporting.

ISM Expanding While Retail Sales Remain Strong

During the same week as the Employment report, the Institute of Supply Management (ISM) released its latest economic indicators. With the release of the latest Institute of Supply Management national service sector index, analysts saw that the sector continued its expansion. In fact, the services sector came in at 57.1.

Not far off, the Institute of Supply Management national manufacturing index clocked in at 55.4. As a result, the manufacturing sector also indicates expansion. Levels above 50 indicate that the sectors are expanding, whereas levels above 60 tend to be rare.

In April 2022, retail sales rose a substantial 0.9% from March of this year. Also, retail sales jumped 8% higher than last year at this time. Keep in mind these numbers appear as inflation continues to climb globally.

After being hit especially hard by the pandemic, bar and restaurants sales progressed with their steady recovery. In April 2022, bars and restaurants posted solid gains. More so, their job gains soared an impressive 20% higher than a year ago. Despite rising prices and economic uncertainty, consumer spending reflects extremely strong so far this year.

Low Housing Inventory Contributes to Weak May 2022 Mortgage Market

In April 2022, sales of existing homes posted an expected small decline from March of this year. Therefore, existing home sales declined to the lowest level since June 2020. Also worth noting, existing home sales declined 6% lower than last year at this time.

Further shifting the balance in favor of home sellers, the median existing-home price rose yet again. Now, the median existing-home price skyrocketed 15% higher than this time last year. As a result, the median existing-home price now reached a record $391,200.

Reflecting the May 2022 mortgage market, rates and home prices both saw increases over recent months. Now, sales of new homes in April declined a massive 17% from March of this year. Thus, new home sales fell to an annualized rate of 591,000. Concurrently, new home sales fell far below the consensus forecast of 750,000. Down from 839,000 in January 2021, new home sales also reached their lowest level since April 2020. The median new-home price was an eye opening 20% higher than last year at this time hitting $450,600.

Housing Inventory Stifles May 2022 Mortgage Market

Meanwhile, inventory levels to be a major headwind. In fact, inventory levels declined 10% from a year ago. Currently, housing market inventory sits at just a 2.2-month supply nationally. This remained far below the 6-month supply. Analysts consider a 6-month home supply to represent a healthy balance between buyers and sellers.

As has been the case for years, home buyers desperately need more inventory in many regions. On the housing inventory front, the most recent data on housing starts sent mixed signals. In April, overall housing starts decreased slightly from March. In doing so, housing starts fell a bit short of expectations. Single-family starts declined 7% from March 2022. That said, single-family housing starts remained well above the levels seen prior to the pandemic.

Once again, builders reported higher prices. In addition, home builders face shortages for land, materials, and skilled labor. Conclusively, this amalgamation of building challenges present barriers to a faster pace of home construction.

Looking Ahead After Analysis of May 2022 Mortgage Market

After the events affecting the May 2022 mortgage market, investors continue to keep a close eye on news about the Russian invasion of Ukraine. Similarly, the spread of COVID-19 cases in China continues to dominate global headlines. While investors anticipated a 50-basis point increase at the June 15th Federal Reserve meeting, the Fed sent them spiraling with a 75-basis hike to the federal funds rate. However, MBSQuoteline plans to further dissect this development during our June 2022 mortgage market recap.

Aside from the federal funds rate, investors and analysts look for additional guidance on the size of the Federal Reserve’s bond holdings. As previously mentioned, the balance sheet sits at a whopping $9 trillion. With the game plan being to aim for a soft landing, the Federal Reserve has quite a way to go in offloading its balance sheet.

On the economic front, the important monthly Employment report represents the most highly anticipated set of data in June 2022. Furthermore, Thursday’s weekly data on new unemployment claims provides valuable information about labor market conditions. Finally, investors proceed to pay close attention to the reports on inflation, retail sales, and housing.

Last month, May 2022 mortgage markets showed a decline in mortgage rates. Never miss an update with MBSQuoteline. To receive by-the-minute updates on mortgage-backed securities, try our platform free for 14 days.

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