It was a volatile week for mortgage markets, but most of the movement was offsetting, and rates ended just slightly lower. Of all the economic reports released this week, weaker than expected retail sales data was the primary influence.
Since consumer spending accounts for over two-thirds of US economic activity, a large increase in October raised investor optimism for a strong holiday season. However, severe weakness over the final two months of the year dashed those hopes. In December, retail sales plunged 1.1% from November, more than the consensus forecast, and the results for November were revised lower. The pullback was widespread, and particular weakness was seen in department stores, furniture, restaurants, and bars.
In housing news, sales of existing homes fell for the eleventh straight month in December to the lowest level since 2010 and were 35% lower than last year at this time. Inventory levels were an encouraging 10% higher than a year ago, but remain at just a 2.9-month supply nationally. While the median existing-home price of $366,900 was slightly higher than last December, this was down from a record high of $413,800 in June.
Additional home inventory has been badly needed for quite a while, and the latest data on this front contained mixed news. 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, 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.
Investors will continue to look for Fed guidance on the magnitude of future rate hikes and bond portfolio reduction. Fourth quarter gross domestic product (GDP), the broadest measure of economic activity, will be released on Thursday. New Home Sales also will come out on Thursday. The core PCE price index, the inflation indicator favored by the Fed, will be released on Friday. The next Fed meeting will take place on February 1.
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