Throughout the world, inflation continues its rampage as the September 2022 mortgage market soared to new highs. Although the Federal Reserve and European Central Bank remain strong in their aggressive stances against inflation, fears of a global recession remain paramount. Unfortunately, these inflationary pressures took a massive toll on the United States real estate market.
On the optimistic front, the labor market remains tight, offering plenty of room for employees to find better jobs. Furthermore, consumer spending stays strong. However, analysts noticed a shift from purchasing goods to services.
Looking back on previous monthly recaps, September 2022 told a consistent story. However, investors still hold onto that one lingering question, “When will inflationary pressures subside?”
Federal Reserve Remains “Strongly Committed” to Inflation Fight
During a September press conference, Federal Reserve Chair Powell repeated that he is “strongly committed” to fighting inflation. Also, Powell emphasized the importance of reducing inflation before the public starts to view higher levels as normal. In that scenario, the public might form future plans around current inflation levels, leaving prices to stay higher than ever.
According to Powell, Fed officials intend to bring the strong labor market back into “better balance” with their tighter stance on monetary policy. In doing so, the Fed hopes to reduce outsized wage increases and lessen inflationary pressures. Heading into the September 21st Federal Reserve meeting, investors largely anticipated a 75-basis point rate hike.
Consumer Price Index Contributed to September 2022 Mortgage Market Climb
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 August 2022, CPI rose 8.3% higher than a year ago. Thus, CPI flew well above the consensus forecast of 8.0%.
Meanwhile, Core CPI excludes the volatile food and energy components. In addition, Core CPI provides a clearer picture of the longer-term trend. In August 2022, Core CPI climbed 6.3% from a year ago, also far above the consensus forecast. Furthermore, Core CPI neared its peak of 6.5% in March of this year, the highest since 1982. With the Core CPI annual rate remaining far above the readings around 2.0% seen early in 2021, the September 2022 mortgage market saw a predictable increase in rates. To date, the Federal Reserve still states that 2.0% is their target.
On the consumer front, food prices increased 11% higher than a year ago. Also worth noting, airline fares skyrocketed an enormous 33% higher than last year at this time. To help bring down price increases, investors planned for a 75-basis point increase to the federal funds rate. Some even thought there was a modest chance for an increase of 100 basis points.
Federal Reserve Announces 75-Basis Point Rate Hike
As the majority expected, the Federal Reserve raised the federal funds rate by 75 basis points. Therefore, the Federal Reserve’s new target range increased to 3.00% – 3.25%. In tandem with the latest rate hike, the Fed indicated a strong potential for future rate hikes.
Chair Powell reaffirmed the Federal Reserve strategy of fighting inflation “until the job is done.” With the latest quarterly projections, officials indicated that the federal funds rate will reach a peak of 4.60% early next year. Although a little higher than expected, officials see this rate as the new status quo, at least until the end of 2023.
Also notable, Powell described the housing market as needing “supply and demand to get better aligned”. Ultimately, Powell believes better alignment holds potential to help bring down inflation. Also, Powell suggested that we probably “have to go through a correction” for this to occur.
PCE Price Index Exceeds Current Consensus with 4.9% Annual Increase
While many rely on the Consumer Price Index (CPI) for inflation indications, the Federal Reserve prefers the Personal Consumption Expenditures (PCE) Price Index. Their preference stems from the PCE’s adjustment for consumer preferences over time.
In August 2022, core PCE climbed 4.9% from a year ago. As such, Core PCE exceeded the consensus forecast. However, Core PCE did drop from a peak of 5.4% in February. For comparison, the annual rate of increase fell below the Fed’s target level of 2.0% during the first three months of 2021. Now, investors question how quickly the Fed’s aggressive monetary policy tightening will bring down inflation.
ECB and UK Combat Inflationary Pressures
With inflation surging to decade highs, the European Central Bank (ECB) raised interest rates by a massive 75 basis points. As a results, interest rates achieved their highest levels since 2011. The latest readings showed inflation in the Eurozone at an annual rate above 9%, far above the target level of the ECB of 2%. ECB Chief Lagarde explained that the increase in rates was necessary because inflation is likely to stay above the target for “an extended period.” Investors expect additional 50 basis point rate hikes at the next two meetings.
In the United Kingdom, energy prices (and prices as a whole) rose quite considerably due to the conflict in Ukraine. To help mitigate inflation concerns, the UK government passed new tax cuts and spending measures. Investors reacted to the inflationary implications of this increased deficit spending by pushing bond yields to rise around the world. Also, the Bank of England proclaimed its intentions to buy bonds as tactic for stabilizing global financial markets. Due to the announcement, bond yields quickly declined to roughly the levels seen prior to the fiscal policy change.
Real Estate Suffers Due to Increases in September 2022 Mortgage Market
Following up on Federal Reserve Chair Powell’s thoughts on the housing market, the September 2022 mortgage market greatly hurt home sales. Hurt by higher mortgage rates, sales of existing homes fell for the seventh straight month in August 2022. Now, existing home sales declined to their lowest level since 2015. Of course, this excludes a brief dip near the start of the COVID-19 pandemic.
On the statistical front, existing home sales decreased by 20% year-over-year. With such limited supply, the median existing-home price of $389,500 rose 8% higher than a year ago. Notably, this increase makes for the smallest annual rate of increase since early 2020. Additionally, the median existing-home price tumbled slightly from a record high of $413,800 in June 2022.
New Home Sales Stay Sensitive to September 2022 Mortgage Market Trends
Similar to existing home sales, new home sales also face sensitivity to the September 2022 mortgage market. Although mortgage rates slightly dipped in August 2022, this led to an unexpected surge in sales activity.
After peaking in January 2021 at an annualized rate of 993,000, sales of new homes in July dropped to just 511,000, the lowest level since January 2016. In August 2022, new home sales jumped 29% from July to 685,000, far above the consensus forecast for a slight decline.
The median price of a new home improved by 8% year-over-year to $436,800. Having said that, this also marks for the smallest annual rate of increase since November 2020. With September’s mortgage rates rising, the next set of reports will likely reflect declining activity once more.
Housing Inventory Presents Long-Standing Challenge to Real Estate Market
At just a 3.2-month supply nationally, housing inventory levels remained roughly unchanged year-over-year. Inventory levels were roughly unchanged from a year ago, at just a 3.2-month supply nationally. As always, potential home buyers welcome the sight of a larger supply of new homes. Pessimistically, the latest data proved discouraging.
While overall housing starts in August showed a solid increase from July, analysts attribute the increase almost entirely due to strength in multi-family units. To make matters worse, housing starts of single-family units remained near the lowest levels since early 2020.
In addition, the National Association of Home Builders (NAHB) released a separate survey of home builder sentiment. Unfortunately, home builder sentiment declined for the ninth straight month. Currently, home builder sentiment plummeted to the lowest reading since May 2014. Once more, this excludes a brief period early in the COVID-19 pandemic.
24% of builders reported price reductions. This marks a 19% increase month-over-month. Home builders report many of the same challenges from prior months. The American real estate market faces higher costs. In addition, it also contends with shortages for land, materials, and skilled labor. Resolving these challenges would greatly contribute to a faster pace of new home construction.
Mortgage Applications Plunge as September 2022 Mortgage Market Hits 2007 Highs
Higher mortgage rates took a large toll on mortgage application volumes. Now, mortgage application volumes decreased to their lowest levels in decades. According to the latest data from the Mortgage Bankers Association (MBA), average 30-year fixed rates roughly doubled year-over-year.
Purchase applications plunged 29% from last year at this time. Finally, applications to refinance a loan tanked a shocking 83% from one year ago. In the most recent weekly Freddie Mac survey, average mortgage rates soared a shocking 3.70% from one year ago. Now, the September 2022 mortgage market achieved its highest level since 2007.
Employment Report Reveals Mixed Results
With the publication of the latest Employment report, the data revealed mixed results. Against a consensus forecast of 320,000, the economy gained 315,000 jobs in August 2022. However, prior months saw lower revisions by 107,000.
Holistically, the professional and business services sector performed the best. The healthcare and retail sectors closely followed. Despite the strong performance for some, after several strong months, the leisure and hospitality sectors finally came in relatively weaker.
Unemployment Rate Experiences Unexpected Increase Due to Increased Labor Force
The unemployment rate unexpectedly increased from 3.5% to 3.7%. however, analysts quickly pointed that this mostly occurred due to a large number of people entering the labor force. Overall, the increased labor force displays a sign of strength.
Average hourly earnings fell slightly below expectations. As an indicator of wage growth, average hourly earnings rose just 5.2% higher than a year ago. In a separate report released on Tuesday, job openings remained near record levels above 11 million. As a matter of fact, job openings hover over 4 million more than in January 2020. At present day, the labor market contains approximately two vacant jobs for every unemployed worker.
Consumer Spending Shifts from Goods to Services
Once more, the Institute of Supply Management (ISM) released their monthly indexes. First, the ISM revealed a stable manufacturing sector in terms of prices. In addition, manufacturing posted a 52.8, slightly stronger than expected. Levels above 50 indicate an expanding sector. The prices paid index fell sharply for the second straight month to the lowest level since June 2020. On the other hand, the National Services Sector Index rose to 56.9, also stronger than expected. This data reveals a consumer shift from goods to services.
In conclusion, consumer spending accounts for over two-thirds of the United States’ economic activity. Thus, consumer spending reflects economic health. In August 2022, retail sales increased 0.3% from July, better than the consensus forecast for a slight decline.
While the dollar value of gas sales fell due to lower gas prices, consumers used their savings to purchase other items. Of note, motor vehicle sales jumped a massive 2.8% from July. More so, spending at bars at restaurants climbed a strong 1.1%. In contrast, sales at furniture stores posted significant declines.
Looking Ahead After September 2022 Mortgage Market Data
After the September 2022 mortgage market capped off the month by hitting 2007 highs, investors still seek additional guidance from the Federal Reserve. As has been the trend, investors hope for additional feedback from the Fed on future increases to the federal funds rate. More so, investors desire more information on the Fed’s timeline for its bond portfolio reduction strategy.
Kicking off the month of October, the Institute of Supply Management plans to release its two reports consecutively. First, the ISM National Manufacturing Sector Index publishes on Monday. Second, the ISM National Services Sector Index comes out on Wednesday.
Towards the end of the week, investors will have their hands on the most highly anticipated economic data of the month: The Employment Report. As always, the Employment Report contains key statistics on the latest number of job openings, the unemployment rate, and wage inflation.
As inflation continued to rise, September 2022 mortgage markets saw a massive increase to cap off the month. 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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