by Calculated Risk on 4/10/2024 02:00:00 PM

From the Fed: Minutes of the Federal Open Market Committee, March 19–20, 2024. Excerpt:

In their discussion of inflation, participants observed that significant progress had been made over the past year toward the Committee's 2 percent inflation objective even though the two most recent monthly readings on core and headline inflation had been firmer than expected. Some participants noted that the recent increases in inflation had been relatively broad based and therefore should not be discounted as merely statistical aberrations. However, a few participants noted that residual seasonality could have affected the inflation readings at the start of the year. Participants generally commented that they remained highly attentive to inflation risks but that they had also anticipated that there would be some unevenness in monthly inflation readings as inflation returned to target.

In their outlook for inflation, participants noted that they continued to expect that inflation would return to 2 percent over the medium term. They remained concerned that elevated inflation continued to harm households, especially those least able to meet the higher costs of essentials like food, housing, and transportation. A few participants remarked that they expected core nonhousing services inflation to decline as the labor market continued to move into better balance and wage growth moderated further. Participants discussed the still-elevated rate of housing services inflation and commented on the uncertainty regarding when and by how much lower readings for rent growth on new leases would pass through to this category of inflation. Several participants noted that the disinflationary pressure for core goods that had resulted from the receding of supply chain bottlenecks was likely to moderate. Other factors related to aggregate supply, such as increases in the labor force or better productivity growth, were viewed by several participants as likely to support continued disinflation. Some participants reported that business contacts had indicated that they were less able to pass on price increases or that consumers were becoming more sensitive to price changes. Some participants observed that longer-term inflation expectations appeared to remain well anchored, as reflected in a broad range of surveys of households, businesses, and forecasters, as well as measures from financial markets.
...
Participants noted indicators pointing to strong economic momentum and disappointing readings on inflation in recent months and commented that they did not expect it would be appropriate to reduce the target range for the federal funds rate until they had gained greater confidence that inflation was moving sustainably toward 2 percent.
emphasis added

by Calculated Risk on 4/10/2024 11:35:00 AM

The Cleveland Fed released the median CPI and the trimmed-mean CPI.

According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.4% in March. The 16% trimmed-mean Consumer Price Index increased 0.3%. "The median CPI and 16% trimmed-mean CPI are measures of core inflation calculated by the Federal Reserve Bank of Cleveland based on data released in the Bureau of Labor Statistics’ (BLS) monthly CPI report".

Click on graph for larger image.

This graph shows the year-over-year change for these four key measures of inflation. 

On a year-over-year basis, the median CPI rose 4.6% (unchanged from 4.6% in February), the trimmed-mean CPI rose 3.6% (up from 3.5%), and the CPI less food and energy rose 3.8% (unchanged from 3.8%). 

Core PCE is for February was up 2.8% YoY, down from 2.9% in January.

Note: The Cleveland Fed released the median CPI details. Rent and Owner's equivalent rent are still very high, and if we exclude rent, median CPI would be around 1.95% year-over-year. 

by Calculated Risk on 4/10/2024 08:54:00 AM

Here are a few measures of inflation:

The first graph is the one Fed Chair Powell had mentioned when services less rent of shelter was up around 8% year-over-year.  This declined, but has turned up recently, and is now up 4.8% YoY.

Click on graph for larger image.

This graph shows the YoY price change for Services and Services less rent of shelter through March 2024.

Services were up 5.3% YoY as of March 2024, unchanged from 5.0% YoY in February.

Services less rent of shelter was up 4.8% YoY in March, up from 3.9% YoY in February.

The second graph shows that goods prices started to increase year-over-year (YoY) in 2020 and accelerated in 2021 due to both strong demand and supply chain disruptions.

Durables were at -2.1% YoY as of March 2024, down from -1.6% YoY in February.

Commodities less food and energy commodities were at -0.7% YoY in March, down from -0.3% YoY in February.

Here is a graph of the year-over-year change in shelter from the CPI report (through March) and housing from the PCE report (through February)

Shelter was up 5.6% year-over-year in March, down from 5.8% in February. Housing (PCE) was up 5.8% YoY in February, down from 6.1% in January.

This is still catching up with private data.  The BLS noted this morning: "The index for shelter rose in March, as did the index for gasoline. Combined, these two indexes contributed over half of the monthly increase in the index for all items."

Core CPI ex-shelter was up 2.4% YoY in March, up from 2.2% in February.

by Calculated Risk on 4/10/2024 08:30:00 AM

From the BLS:

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.4 percent in March on a seasonally adjusted basis, the same increase as in February, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 3.5 percent before seasonal adjustment.

The index for shelter rose in March, as did the index for gasoline. Combined, these two indexes contributed over half of the monthly increase in the index for all items. The energy index rose 1.1 percent over the month. The food index rose 0.1 percent in March. The food at home index was unchanged, while the food away from home index rose 0.3 percent over the month.

The index for all items less food and energy rose 0.4 percent in March, as it did in each of the 2 preceding months. Indexes which increased in March include shelter, motor vehicle insurance, medical care, apparel, and personal care. The indexes for used cars and trucks, recreation, and new vehicles were among those that decreased over the month.

The all items index rose 3.5 percent for the 12 months ending March, a larger increase than the 3.2-percent increase for the 12 months ending February. The all items less food and energy index rose 3.8 percent over the last 12 months. The energy index increased 2.1 percent for the 12 months ending March, the first 12-month increase in that index since the period ending February 2023. The food index increased 2.2 percent over the last year.
emphasis added

The change in both CPI and core CPI were above expectations. I'll post a graph later today after the Cleveland Fed releases the median and trimmed-mean CPI.

by Calculated Risk on 4/10/2024 07:00:00 AM

From the MBA: Mortgage Applications Increase in Latest MBA Weekly Survey

Mortgage applications increased 0.1 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending April 5, 2024.

The Market Composite Index, a measure of mortgage loan application volume, increased 0.1 percent on a seasonally adjusted basis from one week earlier. On an unadjusted basis, the Index increased 0.2 percent compared with the previous week. The Refinance Index increased 10 percent from the previous week and was 4 percent higher than the same week one year ago. The seasonally adjusted Purchase Index decreased 5 percent from one week earlier. The unadjusted Purchase Index decreased 4 percent compared with the previous week and was 23 percent lower than the same week one year ago.

“Mortgage rates moved higher last week as several Federal Reserve officials reiterated a patient posture on rate cuts. Inflation remains stubbornly above the Fed’s target, and the broader economy continues to show resiliency. Unexpectedly strong employment data released last week further added to the upward pressure on rates,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “The 30-year fixed rate increased to 7.01 percent, the highest in over a month. Purchase applications were down almost five percent to the lowest level since the end of February, but refinance applications were up 10 percent, driven particularly by VA refinance applications.”
...
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($766,550 or less) increased to 7.01 percent from 6.91 percent, with points remaining at 0.59 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.
emphasis added

Click on graph for larger image.

The first graph shows the MBA mortgage purchase index.

According to the MBA, purchase activity is down 23% year-over-year unadjusted.  

Red is a four-week average (blue is weekly).  

Purchase application activity is up slightly from the lows in late October 2023, and below the lowest levels during the housing bust.  

The second graph shows the refinance index since 1990.

With higher mortgage rates, the refinance index declined sharply in 2022, and has mostly flat lined since then.

by Calculated Risk on 4/09/2024 07:43:00 PM

Note: Mortgage rates are from MortgageNewsDaily.com and are for top tier scenarios.

Wednesday:
• At 7:00 AM ET, The Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.

• At 8:30 AM, The Consumer Price Index for March from the BLS. The consensus is for 0.4% increase in CPI (up 3.5% YoY) and a 0.3% increase in core CPI (up 3.7% YoY).

• At 2:00 PM, FOMC Minutes, Meeting of March 19-20<

by Calculated Risk on 4/09/2024 03:50:00 PM

Currently CPI is a significant market mover, especially for mortgage rates. Here are two previews on the report tomorrow.

From BofA:

After two firm reports to start the year, core CPI inflation should cool off in March. We expect core CPI inflation to round down to 0.2% m/m (0.24% unrounded) owing to a slight decline in core goods prices and less price pressure from core services. Meanwhile, headline CPI should round up to 0.3% m/m (0.25% unrounded). If our forecast proves correct, it should provide some confidence to the Fed.

From Goldman:

We expect a 0.27% increase in March core CPI (vs. 0.3% consensus), corresponding to a year-over-year rate of 3.70% (vs. 3.7% consensus). We expect a 0.29% increase in March headline CPI (vs. 0.3% consensus), which corresponds to a year-over-year rate of 3.37% (vs. 3.4% consensus).

by Calculated Risk on 4/09/2024 11:16:00 AM

Today, in the Calculated Risk Real Estate Newsletter: An Update on the House Price Battle Royale: Low Inventory vs Affordability

A brief excerpt:

Almost a year ago I wrote: House Price Battle Royale: Low Inventory vs Affordability. Here is an update as the battle continues!

I’ve been wrestling with the impact on house prices of the rapid increase in mortgage rates and monthly payments over the last two years. My reaction was the current situation was somewhat similar to the 1978 to 1982 period and we would likely see prices decline in real terms (adjusted for inflation). See from March 2022: Housing: Don't Compare the Current Housing Boom to the Bubble and Bust.

In that article I wrote on prices:

[W]e should expect something similar to the what happened in the late ‘70s - a decline in real house prices seems likely … Currently we just have to watch and wait. However, we can be fairly confident that we won’t see cascading nominal price declines like during the housing bust - since there will be few distressed sales.

In the 1980 period, nominal prices only declined slightly on a month-to-month basis a few times according to the Case-Shiller National house price index. However, real prices - adjusted for inflation - declined 10.7% from the peak. The inflation adjusted peak was in October 1979, and real prices didn’t exceed that peak until May 1986 (See from October 2022: House Prices: 7 Years in Purgatory).

There is much more in the article.

by Calculated Risk on 4/09/2024 08:31:00 AM

Note: I covered apartments and offices in the newsletter: Moody's: Apartment Vacancy Rate Unchanged in Q1; Office Vacancy Rate at Record High

From Moody’s Analytics economists: Apartment and Retail in Holding Pattern, Office Evolution and Stress Continued, And Industrial Fundamentals Leveled Off

Q1 2024 data revealed trends similar to those observed in 2023, with retail vacancy rate remaining stable at 10.3%. Asking rents rose slightly by 0.2% to $21.69 per sqft, while effective rents also enjoyed 0.2% increase to $18.98 per sqft. During the holiday season, consumer activity was robust but as expected, decelerated in January as retailers reduced their expenditures at the start of the year. However, February marked a resurgence in consumer spending, with retail sales climbing by 0.6%. It is anticipated that overall retail sales in 2024 will mirror those of 2023, albeit with a larger share attributed to non-store and online transactions. The quarter also saw the addition of 198,000 square feet in new retail construction. Despite this growth, the retail sector continues to confront familiar financing obstacles due to persistent high interest rates, suggesting little change in this trend for the remainder of the year. Although bankruptcy announcements have been prevalent, the vacancy rate has remained steady. This stability is partly due to new, smaller store openings by entities that normally wouldn’t fill this space, such as Macy's and Toys R Us.

This graph shows the strip mall vacancy rate starting in 1980 (prior to 2000 the data is annual). 

Back in the '80s, there was overbuilding in the mall sector even as the vacancy rate was rising. This was due to the very loose commercial lending that led to the S&L crisis.

In the mid-'00s, mall investment picked up as mall builders followed the "roof tops" of the residential boom (more loose lending). This led to the vacancy rate moving higher even before the recession started. Then there was a sharp increase in the vacancy rate during the recession and financial crisis.

Recently the vacancy rate has held steady at a high level as online shopping continues to impact brick and mortar stores.

by Calculated Risk on 4/08/2024 07:08:00 PM

From Matthew Graham at Mortgage News Daily: Mortgage Rates Near Highest Levels Since February

Mortgage rates moved up somewhat abruptly today as the bond market lost more ground over the weekend ... there weren't any compelling news headlines or economic reports driving the weakness. It would be better thought of as a hangover from Friday's jobs report.

As the week progresses, there will certainly be at least one major economic report with a proven track record of causing big reactions in rates: the Consumer Price Index (CPI) on Wednesday morning. With the average lender already near the highest levels since February, a bad reaction to CPI could easily launch rates back to levels not seen since November. On the other hand, if CPI manages to come in much lower than expected, rates would almost certainly drop. [30 year fixed 7.11%]
emphasis added

Tuesday:
• At 6:00 AM ET, NFIB Small Business Optimism Index for March.