After 2022 demonstrated recent record highs, the new year kicked off with lower January 2023 mortgage rates. As the COVID-19 pandemic took over the world, world economies began to suffer. In the face of reduced economic activity, global banks and governments flooded their markets with money. Eventually, this increased capital led to surging inflation around the world.
Looking back at 2022, the story shifted to tapering the rising inflation. To bring inflation back under control, central banks aggressively tightened monetary policy last year. Thus, mortgage rates rose to record highs, increasing challenges related to housing affordability. While mortgage rates started 2022 below 3.50%, they later went on to double. However, mortgage rates eased slightly throughout the final weeks of 2022.
January 2023 Mortgage Rates Require a “Sustained Downward Path”
At the beginning of January 2023, the December 14th Federal Reserve meeting minutes came out. Unsurprisingly, the latest Federal Reserve minutes repeated their firm commitment to restrictive monetary policy to fight inflation. In addition, the minutes revealed that no officials expect any federal funds rate cuts in 2023.
According to the minutes, Federal Reserve officials observed that their strategy needed “to take some time” to gain confidence that inflation was on a “sustained downward path”. Ideally, the Federal Reserve wants to see interest rates fall to their stated target level of 2.0%. For the most part, both officials and investors expect additional rate hikes early in 2023. Notably, some investors anticipate that the Fed will reach its terminal rate soon (the terminal rate is also referred to the interest rate peak). in the event that the Federal Reserve reaches its terminal rate, they plan to cut rates late in the year due to slower economic growth.
United States Economy Draws Smallest Monthly Job Increase in Two Years
As the Federal Reserve officials closely kept their eyes on January 2023 mortgage rates, the labor market “tightness” played a big role in the economy. With Fed officials closely watching for labor market tightness to ease, the economy gained 223,000 jobs in December. Looking at the data, this latest labor market figure marks the smallest monthly increase in two years.
Also, average hourly earnings increased 4.6% higher than a year ago. As an indicator of wage growth, this fell far below the consensus forecast of 5.0%. similar to job gains, it also represents the lowest level since August 2021. Finally, the unemployment rate unexpectedly fell from 3.6% to 3.5%. Overall, this matched the lowest level in decades. From an investment standpoint, analysts concentrated primarily on the surprising earnings data. Holistically, slower wage growth reduces inflationary pressures. Therefore, the jobs report generated a favorable impact for mortgage rates.
Capping off the first week of economic reports, the Institute of Supply Management (ISM) released its two major indexes. Both revealed weaker economic growth. First, the ISM national services sector index fell to 49.6. Then, the ISM national manufacturing index dropped to 48.4. Not only do readings under 50 indicate that both sectors are contracting, last month’s readings also plummeted to the lowest levels since May 2020.
Consumer Price Index Matches Consensus Forecast but Drops Below Last Month’s Annual Rate
In the second week of the month, the Consumer Price Index report became the first to shift January 2023 mortgage rates. As a closely monitored inflation indicator, the Consumer Price Index (CPI) looks at price changes for a broad range of goods and services. Meanwhile, Core CPI excludes the volatile food and energy components. Furthermore, Core CPI provides a clearer picture of the longer-term inflation trend.
Used Car Prices, Airline Prices, and Shelter Costs Contribute to Core CPI Decline
In December 2022, Core CPI climbed 5.7% from last year’s number. Although the Core CPI statistic matched the consensus forecast, it reflected a decline from an annual rate of 6.0% last month. Analysts immediately attributed the drop in used care prices as one of the root causes. As a matter of fact, used car prices decreased 2.5% in December 2022.
Similarly, airline fares also showed a steep monthly decline (although still much higher year-over-year). Shelter costs, which account for roughly one-third of the CPI index, continued to post significant gains in December. Generally, shelter costs operate with a lag effect. Current indicators of shelter costs such as newly signed rental agreements suggest that this sector holds potential to provide downward pressure on inflation readings in early 2023.
Federal Reserve Officials and Investors Suspect Inflation to Peak Soon
Inflation remains far above the readings around 2.0% seen early in 2021, the Federal Reserve’s stated target level. To help reduce inflationary pressures and reach this goal, the Fed plans to raise the federal funds rate a little more at future meetings.
Both Fed officials and investors anticipate the peak in rates to be reached soon. However, they disagree on the outlook. On one hand, nearly all of the Federal Reserve officials expect interest rates to hold steady at their peak level till the end of 2023. Conversely, investors anticipate slower economic growth to force the Federal Reserve to begin cutting the federal funds rate later in the year.
Consumer Spending Shows Severe Weakness in Last Two Months of 2022
Looking at January 2023 mortgage rates as a whole, the third week displayed the most market volatility. However, the movements offset one another. As a result, mortgage rates ended the week just slightly lower. Of all the economic reports released this week, weak retail sales held the largest influence.
Consumer spending accounts for over two-thirds of the United States’ economic activity. Early in 2022, October retail sales helped investor optimism to soar heading into the holiday season. Unfortunately, the final two months failed to measure up to October’s strong sales activity. Dashing investor hopes, December 2022 retail sales plunged 1.1% from November.
Although December’s results exceeded the consensus forecast overall, analysts later revised November’s figures to be lower. Despite a widespread pullback, department stores, furniture stores, restaurants, and bars demonstrated particular weakness in consumer spending.
Sales of Existing Homes Fall for the Eleventh Month in a Row
With January 2023 mortgage rates remaining well above their point from one year prior, the housing market continued to suffer. In December 2022, sales of existing homes fell for the eleventh straight month. Now, sales of existing homes plunged to their lowest level since 2010. Thus, existing home sales fell 35% lower from 2021. The median existing-home price of $366,900 climbed slightly higher than last December. However, this dropped from a record high of $413,800 in June 2022.
Housing Inventory Shows 10% Growth Year-Over-Year Despite Lower January 2023 Mortgage Rates
On a more positive note, inventory levels showed an encouraging 10% growth year-over-year. That said, housing inventory still remains at just a 2.9-month supply nationally. For reference, a 6.0-month supply reflects a healthy balance between home buyers and home sellers. As an ongoing challenge for the United States housing market, prospective buyers desperately need additional home inventory.
In December, single-family housing starts increased 11% from November to the best level since August. By contrast, single-family building permits, a leading indicator, fell 7% from November to the lowest level since February 2016. Builders reported that higher prices for land, materials, and skilled labor continued to hold back a faster pace of construction.
Mortgage Application Volumes Finally See Daylight Amidst High January 2023 Mortgage Rates
Mortgage application volumes, which recently dropped to the lowest levels in 25 years, have finally responded positively to the decline in mortgage rates seen since the end of October. According to the latest data from the Mortgage Bankers Association (MBA), purchase applications jumped 25% last week, but are still down 35% from last year at this time. Applications to refinance a loan soared an even larger 34% from last week, but remain down a massive 81% from one year ago.
In housing news, sales of new homes rose slightly in December, matching expectations, but it was a tough year. Due to rising prices and higher mortgage rates, new home sales in 2022 dropped 16% from 2021. The median new-home price of $442,100 was 8% higher than last December.
Core PCE Data Hovers Well Above Federal Reserve’s Target Goal
There were no significant surprises in the major economic data released this week. As a result, mortgage rates ended nearly unchanged. The PCE price index is the inflation indicator favored by the Fed because it adjusts for changes in consumer preferences over time.
In December, core PCE was up 4.4% from a year ago, matching expectations, and at the lowest annual rate since October 2021. However, this remains far above the Fed’s target level of 2.0%. This is particularly relevant because how quickly their aggressive monetary policy tightening will bring down inflation has enormous implications for financial markets.
Gross Domestic Product Alludes to Future Weakness in 2023
Gross Domestic Product (GDP) is the broadest measure of economic activity. During the fourth quarter, GDP rose at an annualized rate of 2.9%, slightly above the consensus forecast, but down from 3.2% during the third quarter.
Strength was seen in consumer and government spending, while residential investment (housing) remained a major source of weakness. Due to tighter monetary policy, early forecasts are for GDP growth to continue to weaken in 2023.
Looking Ahead After Reports Affecting January 2023 Mortgage Rates
There will be two extremely important events next week. Kicking off the new year, the first Federal Reserve meeting of 2023 takes place on Wednesday. Investors expect a 25-basis point increase in the federal funds rate. Investors continue to look for guidance on the magnitude of future rate hikes and bond portfolio reduction.
The key Employment report releases on Friday. These figures showing the number of jobs, the unemployment rate, and wage inflation represent the most highly anticipated economic data of the month. In addition, the ISM national manufacturing sector index comes on Wednesday. Lastly, the ISM national services sector index publishes on Friday.
Although Federal Reserve officials and investors expect to see a lengthy battle with inflation, January 2023 mortgage rates dropped in the first month of the new year. 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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