August 2022 Mortgage Rates Soar Amongst Stubborn Inflation Levels

Taking a look back at August 2022 mortgage rates, mortgage-backed securities continued to soar amongst stubbornly high inflation levels. Meanwhile, the Federal Reserve and European Central Bank raised interest rates even higher. This falls in line with both banks’ stance on “aggressive monetary policy tightening”.

Although the world’s central banks did so to reduce inflationary pressures, investors expect additional rate hikes in 2022. In conclusion, mortgage rates ended the month of August at a higher point.

Inflationary Pressures Drives Upward Mobility for August 2022 Mortgage Rates

Inflation generated a heavy impact for August 2022 mortgage rates. As both the United States and Europe continued to deal with rising inflation, rates progressed in their upward mobility. However, the central banks reinforced their aggressive stance towards tightening monetary policy.

On the reporting front, both the Consumer Price Index (CPI) and the Personal Consumption Expenditures (PCE) witnessed year-over-year growth, albeit with differing expectations. Overall, the most significant event in August occurred midway through with the annual Jackson Hole Economic Summit.

Consumer Price Index Increases 8.5% Year-Over-Year

Investors and analysts closely watch the Consumer Price Index (CPI) for inflation indications. This report looks at price changes for a broad range of goods and services. In July 2022, CPI increased 8.5% higher year-over-year. Not only did CPI fail to reach the consensus forecast, but it also dropped sharply from 9.1% last month.

Another component of the report, Core CPI excludes the volatile food and energy components. In addition, Core CPI provides a clearer picture of the longer-term trend. In July 2022, Core CPI rose 5.9% higher than a year ago. Similarly, Core CPI fell below the consensus forecast. Thus far, the recent peak occurred in March 2022 at 6.5%, the highest annual rate of increase since 1982.

Looking below the surface, apparel prices, used vehicle prices, and airline fares posted declines in July. Housing costs, which represent roughly 40% of core CPI, continued to climb significantly. However, housing costs tend to reflect changing market conditions more slowly than the other items in the index. In other words, current housing costs often take a couple of extra months to pass through to the report due to measurement issues. This lag is one primary reason that Fed officials place more weight on a different inflation report, the PCE price index.

European Union Reveals a Massive 8.9% Annual Rate of Increase

Similar to the United States, Europe recently revealed sharp inflation increases. As a result, global bond yields rose, including United States mortgage rates.

Although inflation moderated slightly in the United States as of late, it surged to record levels in Europe. The latest report from the European Union revealed a massive annual rate of increase of 8.9%. furthermore, the United Kingdom saw an even higher 10.1%.

Like the Federal Reserve, European Central Bank officials target an annual inflation rate of just 2.0%. Europe faces a challenging path towards accomplishing this goal. Due to the ongoing conflict in Ukraine, energy prices experienced a steep increase.

Federal Reserve Meeting Minutes Present No Surprises

In august, the Federal Reserve published their July 27th meeting minutes. Overall, the minutes contained no surprises. Having said that, they also offered no specific guidance on future monetary policy. Officials plan to base their inflation strategy on incoming economic data. In addition, Fed officials debated the relative risks of tightening monetary conditions too much. Holistically, some fear causing unnecessary economic weakness, versus not enough. However, the downside is the risk of “entrenched” inflation (the economy accepts current prices as the new norm).

While the inflation news faired better than expected in July, the annual rate of Core CPI remained far above the readings around 2.0% seen early in 2021. Once again, the Federal Reserve targets 2.0%. Due to this, recent comments from Fed officials indicated that they do not agree with the investor outlook for monetary policy next year.

Officials and investors both anticipate additional rate hikes at the next few meetings. In doing so, this increases the federal funds rate to around 3.50% by the end of the year. At that point, Fed officials expect to either hold rates steady or raise them even more based on economic conditions.

However, investors priced in rate cuts next year on the theory that a slowing economy will cause the Fed to shift back to supporting growth over fighting inflation. Since looser monetary policy generally creates a favorable reaction for mortgage markets, these recent comments predicting a tighter path left an unfavorable impact on mortgage rates.

Personal Consumption Expenditures Fell Below Consensus

The Federal Reserve favors the Personal Consumption Expenditures (PCE) price index as its go-to inflation indicator. In July 2022, Core PCE climbed 4.6% from a year ago. Overall, Core PCE came in a little less than expected, down from a peak of 5.3% in February.

For comparison, the annual rate of increase dropped below the Fed’s target level of 2.0% during the first three months of 2021. Now, investors question how quickly monetary policy tightening will bring down inflation.

Jackson Hole

In a highly anticipated speech from the Jackson Hole economic summit, Fed Chair Powell warned of the consequences of going soft on inflation. Powell believes that not fighting inflation aggressively enough would be worse than the effects of tighter monetary policy. However, tightening monetary policy does include “some pain” for households and businesses.

Powell repeated that the Federal Reserve bases future decisions on incoming economic data. Despite that acknowledgement, he didn’t provide specific guidance. Investors remain divided about whether the Fed will raise the federal funds rate by 50 or 75 basis points at the next meeting on September 21st.

Originally, investors priced in a 50-basis point rate hike. Now, majority price in a 75-basis point increase. Additionally, investors debate next year’s rate hikes. Currently, investors forecast more rate hikes this year followed by rate cuts next year, as economic growth and inflation decline. Comments this week from several Fed officials suggested that investors were pricing in too high a probability of rate cuts next year given the uncertain outlook for the path of inflation.

Strong Employment Report Data Raises August 2022 Mortgage Rates

Last month, the stronger than expected Employment report helped to rise August 2022 mortgage rates. In fact, the Employment report far exceeded forecasts, creating an unfavorable reaction for mortgage markets. Due to the inverse relationship, mortgage rates rose.

Job Gains Display Strength for Leisure and Hospitality Sectors

With the release of August’s Employment report, the labor market displayed near-universal strength. Against a consensus forecast of 250,000, the economy gained 528,000 jobs in July 2022.

However, the leisure and hospitality sectors presented the best performance, gaining a combined 96,000 jobs. Notably, both the leisure and hospitality sectors suffered greatly throughout the early days of the coronavirus pandemic. As a result of the strong performance, the economy now gained more jobs than in early 2020 prior to the pandemic.

Unemployment Rate Falls to 1969 Levels as Wages Grow

Continuing with the positive reporting, the unemployment rate fell from 3.6% to 3.5%. not only did the unemployment rate fall below the consensus forecast, but it also matched the lowest level since 1969.

Finally, we close out with average hourly earnings, an indicator of wage growth. Average hourly earnings improved an impressive 5.2% higher than a year ago, well above the consensus forecast.

Real Estate Market Sees Cancellations as August 2022 Mortgage Rates Climb

As great as things are going for the labor market, the real estate market is seeing virtually the opposite type of impact. As August 2022 mortgage rates rose, real estate activity slowed to a crawl.

Unfortunately, many contracted purchases experienced cancellations. More so, the long-lasting limited housing inventory and sluggish new construction prevail as ongoing issues for the American housing market.

Existing Home Sales Fall for Sixth Straight Month

As august 2022 mortgage rates rose, they took their toll on existing home sales. For the sixth straight month, sales of existing homes fell in July.

Now, existing home sales reached their slowest pace since May 2015 (excluding the dip near the start of the pandemic). Furthermore, existing home sales declined 20% lower than last year at this time. The median existing-home price increased 11% higher than a year ago. Now, it achieved a new record of $403,800.

Homebuilder Sentiment Declines as Market Contains Limited Housing Inventory

Inventory levels remained unchanged from a year ago, at just a low 3.3-month supply nationally. Despite the lingering issue of low inventory levels, new construction relief stays painfully slow. In July 2022, housing starts of single-family units dropped 10% from June to the lowest level since June 2020.

An unusually high 16% of homes that went into contract for purchase in July were canceled. A separate survey of home builder sentiment from the NAHB declined for the eighth straight month to the lowest reading since early in the pandemic. Higher prices and shortages for land, materials, and skilled labor again were listed as major issues holding back a faster pace of construction.

New Home Sales Plummet 30% Year-Over-Year as August 2022 Mortgage Rates Increase

Higher mortgage rates remained an obstacle for housing market activity. Sales of new homes peaked in January 2021 at an annualized rate of 993,000. In July, they fell 13% from June to just 511,000, the lowest level since January 2016. Importantly, this represents a shocking 30% plummet year-over-year.

The median price of a new home increased 8% higher than a year ago at $439,400. As a result of rising prices and mortgage rates, the cancellation rate for contracts to purchase new homes surged in recent months.

Consumer Spending Shifts as August 2022 Mortgage Rates and Inflation Climb

Over the past few years, consumer spending dealt with plenty of volatility. When the COVID-19 pandemic first struck, spending slowed due to the lockdowns and economic uncertainty. On the other hand, it rose with 2021’s bounce-back as the various market sectors returned to form.

Now, consumer spending shifts from goods to services in 2022. However, this most recent report does contain some seasonality.

Institute of Supply Management Shows Ongoing Expansion

In august 2022, the Institute of Supply Management (ISM) painted a picture of shifting consumer spending habits. First, the national services sector index ended several straight months of declines with an unexpected jump to 56.7. Of note, this statistic came in well above the consensus forecast of 54.0.

By contrast, the national manufacturing sector index posted an expected drop to 52.8. Still, levels above 50 indicate that the sectors are expanding. Consistent with other recent data, these two reports suggest that consumers are purchasing more services and fewer goods.

Retail Sales Indicate Seasonal Changes

Consumer spending accounts for over two-thirds of the United States’ economic activity. Thus, consumer spending indicates the economy’s health. In July 2022, retail sales were flat overall from June.

With the gas tax holiday, gas prices declined, along with total gas sales. In the economy, consumers reallocated these savings towards other items. Commonly boosted by back-to-school shopping, electronics sales displayed strength.

Looking Ahead After August 2022 Mortgage Rates End the Month Higher

After August 2022 mortgage rates ended the month higher, investors watch for additional Federal Reserve guidance pertaining to future rate hikes. Furthermore, investors look for insights into the Fed’s bond portfolio reduction strategy.

Kicking off September, the highly anticipated Employment report comes out at the end of the first week. The Employment report contains figures on the number of jobs, the unemployment rate, and wage inflation.

As inflation continued to rise, August 2022 mortgage rates rose by month’s end. 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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