With little major economic news, it was a quiet week for mortgage markets, and rates ended nearly unchanged.
In semi-annual testimony to Congress this week, Chair Powell suggested that the Fed was near the end of its current monetary policy tightening cycle. After raising the federal funds rate at ten consecutive meetings by a massive 500 basis points, the Fed “paused” and made no change at the most recent meeting on June 14. In his testimony, Powell said that two additional 25 basis point rate hikes this year is a “pretty good guess” of what will occur if the economy performs as expected. He explained that economic activity and inflation haven’t slowed as much as anticipated, making some additional tightening necessary. Investors now expect that there will be a 25 b asis point rate hike at the next meeting on July 26.
In housing news, sales of existing homes in May rose slightly from April but still were 20% lower than last year at this time. Inventory levels stand at just a 3.0-month supply nationally, far below the 6-month supply typical in a balanced market. According to the chief economist of the National Association of Realtors, the current supply of existing homes is roughly half the level seen in 2019 prior to the pandemic. The median existing-home price of $396,100 was 3% lower than a year ago and down from a record high of $413,800 in June 2022. This was the largest annual decline in home prices since 2011.
Encouragingly, builders have responded to the severe shortage of previously owned homes available for sale by picking up their pace on new construction. Housing starts in May surged a massive 22% from April, far above the consensus forecast, to the highest level since April 2022. Building permits, a leading indicator, increased 5% from the prior month.
A separate survey of home builder sentiment from the NAHB also rose far more than expected to the highest reading since July 2022. Given the persistent shortage of previously owned homes on the market, new homes currently account for roughly 35% of sales, far above the 10% to 15% typically seen prior to the pandemic. Builders continue to list tight credit conditions for construction loans and high prices for land, labor, and materials as obstacles.
Investors will continue to watch for Fed officials to elaborate on their plans for future monetary policy. New Home Sales and Consumer Confidence will come out on Tuesday. Personal Income and the PCE price index, the inflation indicator favored by the Fed, will be released on Friday.
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