June 2022 Mortgage Markets: Rates Achieve Highest Levels Since 2008

Looking back towards June 2022 mortgage markets, the Federal Reserve remains committed to combatting inflation. However, mortgage rates continue to climb. Along that vein, mortgage and refinance applications tanked compared to the white-hot housing market of 2021.

June 2022 Mortgage Markets: Strong Employment Report in Leisure & Hospitality Sectors

The first report impacting June 2022 mortgage markets was the Employment report. Typically, investors eagerly look towards this report as the most highly anticipated data of the month. Overall, the latest Employment report contained no major surprises.

Job Gains for Leisure & Hospitality Sectors

Against a consensus forecast of 325,000, the economy gained 390,000 jobs in May 2022. Worth noting, the leisure and hospitality sectors demonstrated particular strength. In fact, they gained a combined 84,000 jobs. Ironically, both of these sectors suffered catastrophic job and income losses throughout the COVID-19 pandemic. Analysts attribute this to so many people staying home and cancelling their original travel plans.

Although the leisure and hospitality sectors outperformed expectations, the retail sector told a different story. Unfortunately, the retail industry lost 61,000 jobs. Despite another month of solid gains, the economy currently contains slightly fewer total jobs than in early 2020 prior to the pandemic.

Unemployment Rate Holds Steady While Average Hourly Earnings Declines Slightly

Although the Employment report reflected major job gains, the unemployment rate held steady at 3.6%. fortunately, this number hovers just above the lowest level since 1969.

On the other hand, average hourly earnings jumped an impressive 5.2% higher than a year ago. Having said that, average hourly earnings saw a slight drop from an even larger annual rate of increase of 5.5% last month. Holistically, investors look to the average hourly earnings report for an indication of wage growth.

In a separate report released on last month, job openings remained near record levels above 11 million. Compared to January 2020, there are more than over 4 million more job openings in the current marketplace. In short, the labor market remains extremely tight.

June 2022 Mortgage Markets: Institute of Supply Management Indicates Expansion

During that same week, the Institute of Supply Management (ISM) released their latest manufacturing and service indexes. Both remained at high levels by historical standards.

The national services sector index came in at 55.9. Similarly, the national manufacturing index hit 56.1. Levels above 50 indicate that the sectors are expanding. However, investors rarely see levels above 60. Investors watch to see if consumers will shift to purchasing more services and fewer goods in coming months.

June 2022 Mortgage Markets: European Central Bank Tightens Policy While Applications Plunge

During the second week of the month, June 2022 mortgage markets experienced great volatility after the European Central Bank’s messaging. Although investors focused on inflation for a long time, the latest readings came in much higher than anticipated. In fact, mortgage rates ended the second week of June even higher.

Consumer Price Index Reflects Increasingly Rising Inflation Rate

Analysts closely look to the Consumer Price Index for inflation indications. Generally, the Consumer Price Index report examines price changes for a broad range of goods and services. Notably, Core Consumer Price Index excludes the volatile food and energy components and provides a clearer picture of the longer-term trend.

In May 2022, Core Consumer Price Index increased 6.0% higher than a year ago. Despite the drop in the April’s 6.2% annual rate of increase of 6.2%, Core Consumer Price Index remains far above the readings around 2.0% seen early in 2021.

As the economy recovers from the coronavirus pandemic, strong consumer demand, supply constraints, and surging commodity prices push prices much higher for a wide range of goods and services. More so, the ongoing Russia-Ukraine conflict and Chinese COVID-19 shutdowns worsened supply chain shortages. While supply chain disruptions clear up over time, investors depend on the Federal Reserve to reduce inflationary pressures. To date, the timeline persistently stays murky.

European Central Bank Announces Aggressive Interest Rate Hikes

At last month’s meeting, the European Central Bank announced that it intended to raise interest rates by 25-basis points. While we now know that the European Central Bank actually raised rates by 50-basis points, the European Central Bank also plans to hike rates again in September by either 25 or 50-basis points.

In conclusion, the September rate hikes depend on whether prices show signs of easing by then. One primary reason for its monetary policy tightening is that inflation in the eurozone reached a record high in May. Also, the European Central Bank significantly raised its forecast for annual inflation for 2022 from 5.1% to 6.8%.

Mortgage & Refinance Applications Plummet Alongside Soaring Rates

In recent months, higher mortgage rates took a large toll on mortgage application volumes. As a matter of fact, mortgage application volumes sank to their lowest in 22 years. According to the latest data from the Mortgage Bankers Association, average 30-year fixed rates climbed over 2.0% higher than a year ago.

Purchase applications dropped down 21% from last year at this time. Even more shockingly, applications to refinance a loan plunged a whopping 75% from one year ago. Now, the Mortgage Bankers Association forecasts that total mortgage originations this year will be over 35% lower than last year due to the massive decline in refinancings.

June 2022 Mortgage Markets: Federal Reserve Launches Latest Rate Hike

In the middle of the month, the United States Federal Reserve tightened monetary policy by a massive amount catching June 2022 mortgage markets off-guard. As a result, mortgage rates reached their highest levels since 2008.

Federal Funds Rate Sees 75-Basis Point Increase at Latest Meeting

As expected, the Federal Reserve raised the federal funds rate by 75 basis points. This latest move from the Federal Reserve marks the largest increase to the federal funds rate since 1994. This move indicates that numerous additional federal funds rate hikes will take place in the coming months.

Federal Reserve Chair Jerome Powell said that an increase of either 50 or 75-basis points was likely at the next meeting in July. The average of the “dot plot” forecasts from officials is that the federal funds rate will end the year at 3.40% and will reach a peak of 3.80% in 2023. Thus, the new dot plot forecasts significantly rose above the prior projections from March 2022.

Also, officials lowered their forecasts for Gross Domestic Product growth in 2022 to 1.7% from 2.8%. One key takeaway was that the Federal Reserve intends to remain tough on inflation even if it slows economic growth. Originally, the Federal Reserve planned for a “soft landing”. Essentially, a soft landing occurs when the Federal Reserve tightens its monetary policy just enough to slow inflation without leading to an economic recession. However, the latest news pertaining to the federal funds rate might make this a tougher goal to achieve.

Consumer Spending Surprisingly Decreases Due to Vehicle Sales

Earlier, MBSQuoteline mentioned that the retail sector saw quite a significant job loss. Just as a reminder, the retail sector lost 61,000 jobs in May. Because consumer spending accounts for over two-thirds of economic activity in the United States, investors and analysts view it as an important indicator of the health of the economy.

While retail sales expected to post a slight gain in May 2022, they instead fell 0.3% from April 2022. Analysts attribute the shortfall to a sharp decline in vehicle sales, as well as reduced spending on furniture and electronics. Despite the negative reading in May, though, consumer spending remains strong 8% higher than a year ago still.

June 2022 Mortgage Markets: Ongoing Real Estate Challenges for Home Buyers

One of the major influences for June 2022 mortgage markets stems from the real estate industry. For more than a decade, the United States dealt with a housing inventory challenge. After the whiplash created by the COVID-19 pandemic, housing values started to climb at a ridiculously fast rate.

Now, the real estate market presents inventory and affordability challenges, both of which increase the difficulty for first-time home buyers. Beyond that, prospective homebuilders face labor and supply shortages, also due to the persisting coronavirus pandemic.

Housing Starts Show Disappointing Figures

buyers desperately need more inventory in many regions. However, May 2022’s housing starts data showed disappointing figures. In May, housing starts fell 14% from April, far below the consensus forecast, to the lowest level since April 2020.

Building permits, a leading indicator of future activity, also fell short of expectations with a 7% decline from April. Once again, builders reported higher prices and shortages for land, materials, and skilled labor as issues holding back a faster pace of construction.

Existing Home Sales Decline for Fourth Straight Month

Sales of existing homes make up roughly 90% of real estate market activity. In May 2022, existing home sales declined for the fourth straight month to the lowest level since June 2020. Also, existing home sales fell 9% lower than last year at this time.

Inventory levels, down 4% from a year ago, remained a big trouble spot, as the number of homes for sale was at just a 2.6-month supply nationally. The median existing-home price was 15% higher than a year ago at a record $407,600.

Also notable, the mix of homes currently selling changed. Sales of homes priced between $100,000 and $250,000 decreased 27% lower than a year ago. Rising prices and competition from investors made it more difficult for buyers to find affordable homes, especially at the lower end of the market. By contrast, sales of homes priced between $750,000 and $1,000,000 jumped 26% during that period.

New Home Sales Offer Beacon of Hope

While existing home sales account for 90% of real estate activity, new home sales make up the remaining 10%. To end the real estate story on a brighter note, new home sales surprised investors with a substantial gain of 11% from April.

In addition, the median new-home price fell modestly from the record-high recorded last month. This helps to make the price of new homes slightly more affordable to prospective buyers.

Looking Beyond June 2022 Mortgage Markets

In his semiannual testimony to Congress, Federal Reserve Chair Powell told lawmakers of the Federal Reserve’s “strong commitment” to bringing down inflation. Furthermore, Federal Reserve Chair Powell described current economic conditions as generally favorable with solid consumer demand and a strong labor market. When asked about the likelihood that the Federal Reserve will be able to aggressively tighten monetary policy without causing a recession, Powell acknowledged that it will be “very challenging.” He also noted that the war in Ukraine and the shutdowns in China due to Covid were adding to inflationary pressures.

After mortgage rates reached their highest levels since 2008 in June 2022, they ended the month slightly lower. News of the European Central Bank and Federal Reserve aggressively tightening monetary policy lowered investors’ outlook for the economy as a whole.

Looking ahead to July 2022, investors continue to closely follow news on Russia-Ukraine War. In addition, investors seek further information on COVID-19 case counts in China. After the most recent increase to the federal funds rate, investors desire additional Federal Reserve guidance on the pace of future rate hikes and bond portfolio reduction.

Kicking off July, the Core Personal Consumption Expenditures, ISM National Manufacturing Index, and Construction Spending reports release during the first week. Especially in regard to Core Personal Consumption Expenditures, investors look for additional inflation indications.

Last month, June 2022 mortgage markets showed mortgage rates soar to their highest levels since 2008. 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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