Investors Choose Safer Assets, Causing Mortgage Rates To Rise
Investors became less concerned about bank troubles and the debt ceiling talks last week. After responding to the initial increase in uncertainty in these areas by shifting to safer assets such as bonds, the easing last week produced the opposite reaction, which was negative for mortgage rates. The economic data contained no significant surprises and had little impact. As a result, rates climbed to the highest levels since early March before the banking industry troubles emerged.
Consumer Spending Shifts Focus To Necessities
Since consumer spending accounts for over two-thirds of U.S. economic activity, the retail sales data is a closely watched measure of the health of the economy. In April, retail sales rose a healthy 0.4% from March, below the consensus forecast, but positive revisions to the March results left the net figures in line with expectations. Looking at the details, restaurants and bars posted another strong month. Beyond that, consumers generally spent more on necessities such as groceries and less on large discretionary items such as furniture and appliances, suggesting that inflation is influencing spending habits.
Existing Home Sales Fall
In housing news, sales of existing homes in April fell 3% from March and were 23% lower than last year at this time. Inventory levels stand at just a 2.9-month supply nationally, far below the 6-month supply typical in a balanced market. The median existing-home price of $388,800 again was a little lower than a year ago and down from a record high of $413,800 in June 2022.
Housing Shortage
The inventory of existing homes for sale is now over 40% lower than in 2019 prior to the pandemic, creating an enormous opportunity for builders to provide additional supply. In fact, the chief economist of the National Association of Home Builders (NAHB) estimates that the U.S. has a shortage of 1.5 million homes and says that a significantly faster pace of construction is needed to reduce that deficit. The most recent government data revealed that home building continues to pick up, but at a very gradual rate. Single-family housing starts in April rose 2% from March. Similarly, single-family building permits, a leading indicator, increased 3% from the prior month.
Builders See Strong Demand for New Homes
Encouragingly, a separate survey of home builder sentiment from the NAHB rose far more than expected to the highest reading since July. Builders clearly are aware of the strong demand for homes and are optimistic, but they listed tighter credit conditions for construction loans and high prices for land, labor, and materials as headwinds for even faster production.
Major Economic News Due This Week
Investors will continue to keep a close eye on the debt ceiling negotiations and banking sector troubles. They will also watch to see if Fed officials elaborate on their plans for future monetary policy. For economic reports, New Home Sales will come out on Tuesday. Personal Income and the core PCE price index, the inflation indicator favored by the Fed, will be released on Friday.
Mortgage Rates for the week of 5-22-2023