Tucson Mortgages Home Loan News 12-16-2019

By Todd Abelson NMLS #180858 on .

Week of December 9th, 2019 in Review

After all of the posturing, back and forth, tweets, and rumors, a phase one trade deal was finally struck with China last week. The key words here are phase one…and the deal, while a good sign that the two sides were able to put something together, was not very substantial. China will buy products like soy beans from the US, the US will lower tariffs and not implement the new ones that were set to go into effect on 12/15. As a result of the trade news, Stocks set new all-time highs, while Bonds were relatively unchanged in aggregate after a volatile week.

The Fed

The Fed left rates unchanged, and the decision was unanimous. The Fed felt the current level of the Fed Funds Rate was appropriate after cutting rates three times this year. There were no changes to the Fed’s view on the economy, as it’s exactly the same as it was last meeting. As expected, the statement had no surprises and was a nonevent. The Fed’s dot chart showed that the Fed was relatively unified in letting rates stay right where they are through all of 2020. During his press conference, Powell indicated that he would need a significant and sustained move up in inflation before he would raise rates.

An Update on Inflation

The Consumer Price Index (CPI), which measures inflation on the consumer level, came in hotter than expectations. The headline reading increased from 1.8% to 2.1% year over year, which is the hottest level in a year.

But the more important Core rate, which strips out food and energy prices, remained stable at 2.3%. This marks the 21st month in a row with a core CPI rate that has a 2 handle.

These levels should be even higher, but there are hedonic adjustments that keep inflation artificially low.  Let’s use a car as an example: the price of a new car is at a record high, but because of hedonic adjustments, CPI says that prices are flat over the past 5 years. The reason being, even though the price of a car has gone up, there are newer features that account for the rise in cost. However, the car is still more expensive, and some buyers may not want the additional features, but have them forced upon them. The price of the car is still higher and is felt by consumers, which is why we believe the rationale of these reports are flawed.

Looking deeper into the report, rents rose by 0.3% for the month and are increasing at a rate of 3.7% on a yearly basis, which is unchanged from last month. Medical care costs were up 0.3% for the month and are up 4.2% year over year.

Making matters worse, the Fed focuses on the Personal Consumption Expenditures (PCE) report, which is running 0.7% lower on the core rate. And PCE doesn’t really account for the cost to put a roof over your head and out of pocket medical expenses. The Fed’s PCE gauge says there is little healthcare inflation because Medicare and Medicaid reimbursement rates are price fixing things lower. This allows the Fed to cite little or no inflation, meanwhile the average consumer is feeling the rise in prices.

The Producer Price Index (PPI), which measures inflation on the wholesale level, was a bit tamer than expected. Headline PPI held steady at 1.1%, but the Core Reading, which strips out the volatile food and energy prices, dropped significantly from 1.6% to 1.3%.

A Return to Normalcy…Or Not

The Mortgage Bankers Association reported that Mortgage Application volume was up 3.8% last week. As we said would happen, applications rebounded and normalized this week after the holiday skewed previous two weeks. Applications to purchase a home were down 0.4% but are now up 5% year over year. Refinances were up 9.0% and are now up 146% year over year.

The average 30-year mortgage rate ticked up from 3.97% to 3.98% week over week, bringing rates 110 basis points (bp) or about 1 1/8% lower than this time last year. The Refinance share of mortgage activity increased from 59.0% to 62.4%.  ARM’s made up 5.0% of all applications, up from 4.8% last week. The FHA share of mortgage activity rose to 13.9% from last week’s 12.7%

The other report that has been skewed due to the holidays is Initial Jobless Claims. And while Mortgage Apps have smoothed out and are finally showing more reliable figures, Initial Jobless Claims is still all over the place. The latest report showed that there were 252,000 individuals that filed for unemployment benefits for the first-time last week. This was 49,000 higher than the previous week, which was unrevised at 203,000 and 39,000 higher than estimates of 213,000. Last week we told you this number could be higher because some people were not going to file during Thanksgiving week. And those individuals naturally filed the following week, making this figure higher than it should be. In this regard, there may be some weakness that could be concerning. The next report will be important to follow and will likely show some clarity on which way is right and which way is wrong.

Technical Analysis Breakdown

Mortgage Bonds are being squeezed between a reliable floor of support that has held the last several times tested, and a familiar triple ceiling. The aforementioned floor of support is at 101.094 and has held the last 5 or so times it was hit, limiting the decline in Bonds. The triple ceiling, created by the 25, 50, and 100-day Moving Averages, will make gains this week a bit challenging. And the optimism surrounding the US and China trade deal should be a good thing for Stocks and potentially negative for Bonds. Because of this, we must be careful and watch Bonds closely, because if support is broken, there is a lot of downside potential.