July 2022 Mortgage Markets Reflect Reduced Inflationary Pressures

After months of upward momentum, July 2022 mortgage markets finally reflected reduced inflationary pressures. However, these reductions are compared to prior months of record-high statistics. As global banks continue their aggressive monetary policy, investors reduced their outlook for economic growth. By month’s end, mortgage rates dropped from June, which reached 2008 highs.

July 2022 Mortgage Markets: Global Inflation Challenges Continue

For inflation indications, the United States Federal Reserve depends on the Personal Consumption Expenditures (PCE) Price Index. In May 2022, core PCE climbed 4.7% higher year-over-year. That said, this statistic actually failed to reach expectations, and represented a decline a little below expectations, and represented a decline from April’s 4.9%.

Towards the end of July, a second PCE Price Index report came out showing a 4.7% increase from May to June (4.8% year-over-year increase). For comparison, the annual rate of increase dropped below 2.0% during the first three months of 2021. At the end of the day, this left investors questioning how quickly inflation will moderate. Additionally, investors still wait for the Russia-Ukraine conflict to find a resolution.

Consumer Price Index Comes in with Stronger Than Expected Data

Aside from PCE, the key Consumer Price Index (CPI) inflation report came in stronger than anticipated. Thus, mortgage rates increased once more. As the second closely watched inflation indicator CPI looks at price changes for a broad range of goods and services. In June, CPI jumped 9.1% higher than a year ago, up from 8.6% last month. Conclusively, CPI achieved the biggest annual rate of increase since 1981. Notably, annual food and energy price gains rose to their highest points in decades.

Continuing with CPI, the Core CPI excludes the volatile food and energy components. Also, Core CPI provides a clearer picture of the longer-term trend. In June 2022, Core CPI rose 5.9% higher than a year ago, down from an annual rate of increase of 6.0% last month. Despite the drop in the annual rate of increase, Core CPI remained far above the readings around 2.0% seen early in 2021.

Economic Challenges Contributing to Rising Inflation Figures

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 COVID-19 shutdowns in China worsened shortages for many key items.

While supply chains ease over time, the Federal Reserve still progressively tightens its belt. Of note, energy and commodity prices declined sharply in recent weeks, which will be reflected in the July data.

July 2022 Mortgage Markets: Economic Outlook Worsens with Inflation

On the economic front, the Institute of Supply Management (ISM) released their National Manufacturing Index. Unfortunately, the index dropped to its lowest level since June 2020. While 53.0 indicates that the manufacturing sector continues its expansion, analysts originally expected a consensus forecast of 54.5.

With inflation in focus, the monthly report on consumer confidence published by the Conference Board received a great deal of attention. Analysts view this report for hints about upcoming changes in spending habits. The latest reading revealed a larger than expected decline to the lowest level since February 2021. While consumers expected the labor market to remain very strong, they intend to scale back on purchases. These cutbacks affect large appliance and motor vehicle purchases, along with vacation plans later in 2022.

Retail Sales Shows Success with a Caveat

Speaking of purchases, consumer spending accounts for over two-thirds of the United States’ economic activity. Therefore, the Retail Sales report indicates the economic health of the country. In June 2022, retail sales rose 1.0% from May, slightly higher than expected. Furniture sales, bars, and restaurants saw particular success throughout the month.

However, the Retail Sales report does not feature figures adjusted for inflation. Moreover, higher prices accounted for some of the gains seen in June. Most likely, analysts will see the tradeoff of today’s purchases and inflation dilemma throughout the next few months.

Gross Domestic Product Validates Negative Economic Outlook

Holistically, Gross Domestic Product (GDP) reflects the broadest measure of economic activity. During the second quarter, GDP fell at an annualized rate of 0.9%, well below the consensus forecast for an increase of 0.5%. that said, GDP improved from a decline of 1.6% during the first quarter.

A wide range of components contained negative readings including inventories, private investment, and government spending. In line with the consumer confidence data, consumer spending towards goods also declined. Interestingly enough, services received increased spending. Despite the mitigation, mortgage rates decreased as a result.

July 2022 Mortgage Markets: Labor Market Shows Impressive Strength

On the upswing, the highly anticipated Employment report generated impressive results. At the time, this temporarily led to another climb for mortgage rates. Against a consensus forecast of just 250,000, the economy added 372,000 jobs in June, right in line with the last few months’ gains.

Meanwhile, the unemployment rate held steady at 3.6%, just above the lowest level since 1969. Average Hourly Earnings, an indicator of wage growth, improved an impressive 5.1% higher than a year ago. Despite the improvement, though down from an even larger annual rate of increase of 5.3% last month.

JOLTS Shows 1.9 Openings for Every Unemployed Worker

Along the same vein, the JOLTS report measures job openings and labor turnover rates. Similar to the Employment report, the most recent JOLTS publication seconded the tight labor market. At the end of May 2022, the United States labor market faced a massive 11.3 million job openings. While this shows a little decrease from March’s record-high, it still lingers over 4 million more than in January 2020 prior to the pandemic.

To put this in perspective, the labor market contained 1.9 job openings for every unemployed worker. A high level of openings reflects a strong labor market, as companies struggle to hire enough workers with the necessary skills. Back in January 2022, a very large number of employees willingly left their jobs. Analysts and media outlets dubbed this trend, ‘The Great Resignation’. From our viewpoint, this reinforces claims of a strong labor market because people usually quit only if they expect that they can find better jobs.

July 2022 Mortgage Markets: Real Estate Faces Limited Inventory

After 2021’s banner year for the United States real estate market, 2022 tells a drastically different story. Sales of existing homes fell for the fifth straight month in June to the lowest level since June 2020. Furthermore, existing home sales plummeted 14% lower than last year at this time. On a more positive note, inventory levels inched 2% higher than a year ago.

As a matter of fact, this details the first annual increase in three years for existing home inventory. Despite the growth, housing inventory sits a measly 3.0 supply across the country. In the real estate world, a 6.0 supply indicates a healthy balance of home buyers and home sellers. Lastly, the ever-climbing median existing-home price skyrocketed 13% higher than a year ago at a record $416,000.

Limited Housing Inventory Plagues the United States

While more inventory is desperately needed in many regions, the latest data proved demoralizing. In June 2022, housing starts of single-family units dropped 8% from May to the lowest level in two years.

A separate survey of home builder sentiment from the NAHB declined far more than expected to the lowest reading since May 2020. Once more, homebuilders pointed to higher prices and shortages for land, materials, and skilled labor as the top barriers to faster construction.

Mortgage Applications Display Shocking Year-Over-Year Declines

From the buyers’ perspective, higher mortgage rates took a large toll on mortgage application volumes. Now, mortgage applications sank to their lowest level since 2000. According to the latest data from the Mortgage Bankers Association (MBA), average 30-year fixed rates summited over 2.5% higher than a year ago.

Conversely, purchase applications plunged 19% from last year at this time. The real shocking statistic? Applications to refinance a loan were completely obliterated, decreasing by a jaw-dropping 80% from one year ago.

July 2022 Mortgage Markets: Global Banks Hike Interest Rates

In July 2022, both the United States Federal Reserve and the European Central Bank progressed in their plans to combat inflation. In the release of June 15th’s Federal Reserve meeting minutes, officials reiterated their primary priority of fighting inflation. Two years ago, the Federal Reserve instituted loose economic policies to boost the economy during the early days of the coronavirus pandemic.

At present-day, the Federal Reserve reversed course, aiming for a soft landing. Essentially, the Federal Reserve aims to weaken inflationary pressures without inducing a full-on economic recession. Markedly, the minutes emphasized that the Federal Reserve wants to prevent expectations for a long cycle of higher prices from becoming “entrenched.”

European Central Bank Meeting Marks First Rate Increase in 11 Years

Later in the month, the European Central Bank (ECB) raised rates by 50 basis points, its first increase in eleven years. Not only did this move surprise investors, but it also lowered mortgage rates.

Many investors expected a smaller rate hike of only 25 basis points. As inflation hit record-high levels in the Eurozone, the ECB sought to reduce inflationary pressures.

Federal Reserve Announces Another 75-Basis Point Hike

Moving back to the Federal Reserve, investors found themselves debating whether the Fed planned a 75 or 100-basis point increase to the federal funds rate. When asked if a 100-basis point rate hike was possible at the next meeting on July 27, the Fed’s Bostic replied that “everything is in play.” Other officials have expressed reluctance for a rare move of that magnitude, however. As it turns out, the Federal Reserve proved the “75” crowd correct.

With the 75-basis point increase to the federal funds rate, this strategic decision matched the largest increase since 1994 (along with the prior meeting’s rate hike). Afterwards, neither the meeting statement nor Federal Reserve Chair Jerome Powell’s press conference comments revealed any unexpected shift in policy. Moving forward, Federal Reserve officials intend to evaluate incoming economic data when determining the size of future rate hikes.

Looking Ahead After July 2022 Mortgage Market News

After the impact of various economic data on the July 2022 mortgage market, investors look for additional Federal Reserve guidance on the pace of future rate hikes. In addition, investors eagerly seek further intel on the Federal Reserve’s bond portfolio reduction initiative. Currently, investors split about whether there will be an increase of 50 or 75 basis points at the next meeting in September.

After July’s strong performance, the monthly Employment report once again takes center stage. Covering figures on the number of jobs, the unemployment rate, and wage inflation, the Employment report reflects the most highly anticipated economic data of the month.

As July 2022 mortgage markets showed slight declines from June’s record high numbers, inflation endures as the top hot-button issue. Never miss an update with MBSQuoteline. To receive by-the-minute updates on mortgage-backed securities, try our platform free for 14 days.

Stay connected with MBSQuoteline on social media by following us on FacebookTwitter, and LinkedIn.

All material Copyright © Ress No. 1, LTD (DBA MBSQuoteline) and may not be reproduced without permission. To learn more about the MortgageTime™ newsletter, please contact MBSQuoteline at 800.627.1077 or info@mbsquoteline.com.