Author:
Eric Bernstein
Published:
Last week gave homebuyers a mixed picture. Home prices are still rising nationally, but the gap between strong and weak markets continues to widen, while July’s monthly PCE inflation came in at a much more manageable 0.2%. The biggest reason for caution was Fed Chair Kevin Warsh’s Jackson Hole speech, which pushed markets towards expecting a rate hike in September and put upward pressure on mortgage rates.
For buyers, that makes leverage even more important. Higher rates can mean fewer competing buyers and more motivated sellers, especially in softer markets. Depending on where you’re buying, that leverage may be better used to negotiate a lower purchase price, larger seller concessions to cover closing costs or buy down the rate, or some combination of both. In tighter markets, buyers may have less negotiating power, which is why the local market matters far more than the national headline.
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Home Prices Are Still Rising, But Not Everywhere
National home prices picked up again in June, with the Case-Shiller National Index rising 1.5% year-over-year, up from 1.2% in May. The 20-city index rose 2.1%, marking the fourth straight month that annual price growth accelerated. That’s pretty impressive considering mortgage rates were hovering around 6.5% during much of the period. Even with affordability stretched, limited inventory in many parts of the country is still keeping meaningful downward pressure off home prices.
But this remains an extremely local housing market. Chicago led the country with prices up 6.9%, followed by New York at 4.8%, while Seattle fell 2.0%, Las Vegas dropped 1.9% and Denver declined 1.2%. The nearly 9 percentage-point gap between Chicago and Seattle is a good reminder that national housing numbers only tell part of the story. Markets with tight inventory are still seeing prices rise, while areas with more new construction and more homes for sale are giving buyers significantly more leverage.
Month-Over-Month PCE Inflation Was Right On Target
July PCE inflation came in hot on an annual basis, with headline inflation rising to 3.7% and core PCE at 3.3%. But the monthly numbers were much more encouraging. Both headline and core PCE rose just 0.2%, a pace Fed Governor Christopher Waller has previously said is consistent with progress toward the Fed’s 2% goal.
The details were fairly tame too. Goods prices fell 0.1%, helped by lower gasoline prices, while services rose 0.3%. Treasury yields did move higher after the report, which put some upward pressure on mortgage rates, but there was nothing in the monthly inflation numbers that screamed the Fed needed to hike again immediately.
So while annual inflation is still much too high for the Fed, July itself looked closer to the pace policymakers want to see. That gave mortgage rates at least some hope that another Fed hike could be avoided. Then Kevin Warsh took the stage at Jackson Hole on Friday.
Fed Chair Warsh Seems Ready To Hike Rates in September
Fed Chair Kevin Warsh used his first Jackson Hole speech to send a pretty clear message: he is not convinced inflation is improving fast enough. Warsh said the better inflation reports this summer “do not tell me that underlying trends have meaningfully improved,” and warned that if inflation isn’t moving toward 2% “clearly and at sufficient speed,” the Fed still has “work to do.”
Markets heard that as a warning that another hike could be coming soon. The probability of a quarter-point rate hike on September 16th has jumped to roughly 64%, up from about 35% before Warsh’s speech. Two-year Treasury yields also surged after he spoke, putting additional upward pressure on mortgage rates.
Wall Street is starting to change its forecasts too. Barclays now expects two more 0.25% hikes this year, in September and December, after previously expecting the Fed to remain on hold. Société Générale is now forecasting the same, while Deutsche Bank continues to expect two hikes this year.
Nothing is guaranteed. We still have another jobs report and inflation data before the September meeting, and weak enough labor data could keep the Fed on hold. But after Jackson Hole, a September hike has gone from a possibility to the market’s most likely outcome.
What to expect this week?
This is a big week for mortgage rates, with the labor market taking center stage. After Warsh’s hawkish Jackson Hole speech, the Fed is already leaning toward a September hike, but weak enough jobs data could quickly change that. Renewed U.S. strikes against Iran add another wildcard, particularly if the conflict pushes oil prices higher and reignites inflation concerns.
Monday is quiet with no major reports scheduled.
Tuesday brings manufacturing data and construction spending, but neither should overshadow what comes later in the week.
Wednesday starts the labor reporting with job openings and ADP employment, giving markets their first real look at whether hiring weakened further in August.
Thursday brings initial jobless claims, along with services-sector reporting and the Fed’s Beige Book.
Friday is the big one: the August employment report. Economists expect roughly 60,000 new jobs, with unemployment holding around 4.1%. Another weak report could significantly reduce the chances of a September hike and help mortgage rates. A stronger-than-expected report would give Warsh more room to raise rates on September 16th.
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