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Inflation is high, so why aren’t mortgage rates higher?

Given how high inflation is right now, why aren’t mortgage rates even higher? Lead Analyst Logan Mohtashami explains.

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Inflation is hot, so why aren’t mortgage rates over 10% like we saw in the 1970s? Put those disco pants back in the closet; this isn’t the 1970s, John, and the bond market has been saying this to anyone who would listen.

Mortgage rates have trended up to over 7% while the 10-year yield has been around 4%, so everything is in the top-end range of my 2023 forecast. But given how high inflation is right now, why aren’t rates even higher? This is a good question because the answer can clear many things up with inflation and mortgage rates.


How I look at mortgage rates ties back to where I think the 10-year yield range will be. This means mortgage rates should stay in the forecast range for the year unless some new variable, like COVID-19, a new war or a more aggressive or dovish Fed happens. The 2023 forecast ranged from 3.21% to 4.25% on the 10-year yield, meaning mortgage rates of 5.75% -7.25%.

Not only has the data stayed firm, but the economic data has improved recently. 

Also, gas prices are down from the peak, and the inflation growth rate is no longer skyrocketing. If the labor market breaks this year, meaning jobless claims noticeably rise, that should send the 10-year yield to 2.73%, and mortgage rates can go as low as 5.25%.

Jobless claims have been solid for some time, and this is a big reason why I don’t believe the Federal Reserve is going to pivot outside of this. They often made it clear they want the labor market to break, so go with that premise until they say otherwise.

Housing permits will fall all year, but sales picked up recently, a positive for the economy, meaning more transfers of commissions. An improving economy puts more risk to the upside in rates and bond yields, especially if inflation data picks up.

If the opposite was happening, economic data would get weaker with less consumption and more people filing for unemployment claims. Rates should fall because, unlike in the 1970s, lower economic growth and fewer jobs should not create more inflation as it did in 1974.

It’s true that inflation is booming like we haven’t seen since the 1970s, but the reality is that if the bond market believed in entrenched inflation, it would have been pricing the 10-year yield much higher over the last year.


CPI inflation took off a few times in the 1970s, along with mortgage rates and the 10-year yield. Now inflation has taken off again, but mortgage rates have yet to get above 8% as we saw in the mid to late 1970s, and the bond market has also not broken over 5.25% on the 10-year yield. Also, the Federal Reserve isn’t discussing taking the Fed Funds rate back to late 1970 levels either.

Housing in the 1970s was booming!

Have you ever wondered why the Federal Reserve said we needed a housing reset in March 2022 but not a labor market reset? They’re targeting the labor market in the sense that if more Americans lose their jobs, we will have more supply of workers, which will lead to less wage growth and less inflation. However, they didn’t use the word reset regarding the labor market. 

The Federal Reserve said it doesn’t want the 1970s entrenched inflation. This means if you’re to believe them, they’re scared to death of a housing boom! In the 1970s, we saw three renting inflation booms, but the entrenched inflation in the mid to late 1970s is what they don’t want to see again.

Even with the recession in 1974, inflation and rates grew, and in the late 1970s inflation and housing demand were booming higher. I don’t believe they believe in this type of inflation, so they’re talking about getting closer to the end of their rate hikes.

Since 43% of core CPI is shelter inflation, you can see why rents are so important. After the 1970s, the growth rate of inflation cooled off as rent inflation cooled off and was pretty stable up until the global pandemic, as you can see below, the year-over-year inflation growth rate.

It’s well known now that the CPI rent inflation data lags badly, and we are already seeing the growth rate of rent cooldown, something I talked about on CNBC last September on CPI inflation day.

From CoreLogic



Now look at the shelter inflation data of CPI today; big difference. To the Fed’s credit, they did create an inflation index to take shelter inflation away from the conversation, meaning they want to focus more on service inflation due to the lag in rent inflation.

Again, this is why I believe they’re scared of 1970s inflation, but they also know deep down inside, as the bond market knows, we don’t have the backdrop of 1970s inflation. I wasn’t sure if they knew of the lag aspect for a while there, but they resolved this by creating their index in December that it doesn’t count housing inflation.



We have a record number of five-unit construction going on, so the most significant component of CPI is already falling in real terms. We have a good supply coming online, too, with the Fed doing what it can to cool the economy down.

So the outlook is good here on preventing a 1970s inflationary boom on rent growth. As we can see below, the 1974 recession also killed the growth of 5 units under construction. This is not the case today!



I have noticed recently that people don’t know how much housing boomed back in the mid to late 1970s. Existing home sales doubled before we saw the collapse in demand. We went from 2 million to 4 million and back to 2 million. We aren’t in the boom sales demand stage today as existing home sales had the biggest one-year monthly sales collapse.




So, while I am not a Fed pivot person until jobless claims break over 323,000 on the four-week moving average, I did have the peak 10-year yield at 4.25% this year with a 7.25% peak mortgage rate level. I am not blinded to the reality that inflation and growth have limits as rates rise, with the supply of five-unit coming on line.

I believe the bond market has always known this, which is why the high inflation levels, the 10-year yield, and mortgage rates don’t look like the 1970s today.

Why would it be less likely for mortgage rates to rise from these levels versus why they would be more likely to fall?

The growth rate of inflation is already cooling off, supply chains are getting better, rental inflation will eventually catch up into the inflation data, plus we have more supply of rental units coming on line. All these things point to us not having a 1970s redux.

It’s getting from here to there that will have a lot of economic noise and confusion, and the Fed doesn’t do itself any favors when they talk weekly and sound like they’re confused about what to do.

However, with that said, we should have a three-handle on the Core PCE growth rate of inflation by the end of the year. Back in the 1970s, this data line which is the Fed’s main target level, was nearing 10%. Today it’s at 4.7% and even the Fed’s forecast shows this slowing down by the end of the year.

While we aren’t going to hit the Fed’s target of 2% year-over-year growth on inflation this year, the growth rate of core PCE is slowing down already, which shows why the Fed and the bond market don’t believe we are going to get to 1970s-level inflation.

We have a lot of noise about rates and inflation lately, and some people say that to destroy inflation, we need a stronger-than-expected job loss recession, such as we saw in the 1970s. Hopefully, the data I showed you today can put the 1970s to rest.

If your baby boomer friends are afraid of the 1970s again, give them a hug and tell them everything will be ok; we will survive this. Don’t forget that Fed rate hikes have a lag, because they have a lagging impact to the economy, the Fed really wants to stop hiking soon, so they don’t have to cut rates faster than they want.

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Aging at AACR Annual Meeting 2024

BUFFALO, NY- March 11, 2024 – Impact Journals publishes scholarly journals in the biomedical sciences with a focus on all areas of cancer and aging…

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BUFFALO, NY- March 11, 2024 – Impact Journals publishes scholarly journals in the biomedical sciences with a focus on all areas of cancer and aging research. Aging is one of the most prominent journals published by Impact Journals

Credit: Impact Journals

BUFFALO, NY- March 11, 2024 – Impact Journals publishes scholarly journals in the biomedical sciences with a focus on all areas of cancer and aging research. Aging is one of the most prominent journals published by Impact Journals

Impact Journals will be participating as an exhibitor at the American Association for Cancer Research (AACR) Annual Meeting 2024 from April 5-10 at the San Diego Convention Center in San Diego, California. This year, the AACR meeting theme is “Inspiring Science • Fueling Progress • Revolutionizing Care.”

Visit booth #4159 at the AACR Annual Meeting 2024 to connect with members of the Aging team.

About Aging-US:

Aging publishes research papers in all fields of aging research including but not limited, aging from yeast to mammals, cellular senescence, age-related diseases such as cancer and Alzheimer’s diseases and their prevention and treatment, anti-aging strategies and drug development and especially the role of signal transduction pathways such as mTOR in aging and potential approaches to modulate these signaling pathways to extend lifespan. The journal aims to promote treatment of age-related diseases by slowing down aging, validation of anti-aging drugs by treating age-related diseases, prevention of cancer by inhibiting aging. Cancer and COVID-19 are age-related diseases.

Aging is indexed and archived by PubMed/Medline (abbreviated as “Aging (Albany NY)”), PubMed CentralWeb of Science: Science Citation Index Expanded (abbreviated as “Aging‐US” and listed in the Cell Biology and Geriatrics & Gerontology categories), Scopus (abbreviated as “Aging” and listed in the Cell Biology and Aging categories), Biological Abstracts, BIOSIS Previews, EMBASE, META (Chan Zuckerberg Initiative) (2018-2022), and Dimensions (Digital Science).

Please visit our website at www.Aging-US.com​​ and connect with us:

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Click here to subscribe to Aging publication updates.

For media inquiries, please contact media@impactjournals.com.


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NY Fed Finds Medium, Long-Term Inflation Expectations Jump Amid Surge In Stock Market Optimism

NY Fed Finds Medium, Long-Term Inflation Expectations Jump Amid Surge In Stock Market Optimism

One month after the inflation outlook tracked…

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NY Fed Finds Medium, Long-Term Inflation Expectations Jump Amid Surge In Stock Market Optimism

One month after the inflation outlook tracked by the NY Fed Consumer Survey extended their late 2023 slide, with 3Y inflation expectations in January sliding to a record low 2.4% (from 2.6% in December), even as 1 and 5Y inflation forecasts remained flat, moments ago the NY Fed reported that in February there was a sharp rebound in longer-term inflation expectations, rising to 2.7% from 2.4% at the three-year ahead horizon, and jumping to 2.9% from 2.5% at the five-year ahead horizon, while the 1Y inflation outlook was flat for the 3rd month in a row, stuck at 3.0%. 

The increases in both the three-year ahead and five-year ahead measures were most pronounced for respondents with at most high school degrees (in other words, the "really smart folks" are expecting deflation soon). The survey’s measure of disagreement across respondents (the difference between the 75th and 25th percentile of inflation expectations) decreased at all horizons, while the median inflation uncertainty—or the uncertainty expressed regarding future inflation outcomes—declined at the one- and three-year ahead horizons and remained unchanged at the five-year ahead horizon.

Going down the survey, we find that the median year-ahead expected price changes increased by 0.1 percentage point to 4.3% for gas; decreased by 1.8 percentage points to 6.8% for the cost of medical care (its lowest reading since September 2020); decreased by 0.1 percentage point to 5.8% for the cost of a college education; and surprisingly decreased by 0.3 percentage point for rent to 6.1% (its lowest reading since December 2020), and remained flat for food at 4.9%.

We find the rent expectations surprising because it is happening just asking rents are rising across the country.

At the same time as consumers erroneously saw sharply lower rents, median home price growth expectations remained unchanged for the fifth consecutive month at 3.0%.

Turning to the labor market, the survey found that the average perceived likelihood of voluntary and involuntary job separations increased, while the perceived likelihood of finding a job (in the event of a job loss) declined. "The mean probability of leaving one’s job voluntarily in the next 12 months also increased, by 1.8 percentage points to 19.5%."

Mean unemployment expectations - or the mean probability that the U.S. unemployment rate will be higher one year from now - decreased by 1.1 percentage points to 36.1%, the lowest reading since February 2022. Additionally, the median one-year-ahead expected earnings growth was unchanged at 2.8%, remaining slightly below its 12-month trailing average of 2.9%.

Turning to household finance, we find the following:

  • The median expected growth in household income remained unchanged at 3.1%. The series has been moving within a narrow range of 2.9% to 3.3% since January 2023, and remains above the February 2020 pre-pandemic level of 2.7%.
  • Median household spending growth expectations increased by 0.2 percentage point to 5.2%. The increase was driven by respondents with a high school degree or less.
  • Median year-ahead expected growth in government debt increased to 9.3% from 8.9%.
  • The mean perceived probability that the average interest rate on saving accounts will be higher in 12 months increased by 0.6 percentage point to 26.1%, remaining below its 12-month trailing average of 30%.
  • Perceptions about households’ current financial situations deteriorated somewhat with fewer respondents reporting being better off than a year ago. Year-ahead expectations also deteriorated marginally with a smaller share of respondents expecting to be better off and a slightly larger share of respondents expecting to be worse off a year from now.
  • The mean perceived probability that U.S. stock prices will be higher 12 months from now increased by 1.4 percentage point to 38.9%.
  • At the same time, perceptions and expectations about credit access turned less optimistic: "Perceptions of credit access compared to a year ago deteriorated with a larger share of respondents reporting tighter conditions and a smaller share reporting looser conditions compared to a year ago."

Also, a smaller percentage of consumers, 11.45% vs 12.14% in prior month, expect to not be able to make minimum debt payment over the next three months

Last, and perhaps most humorous, is the now traditional cognitive dissonance one observes with these polls, because at a time when long-term inflation expectations jumped, which clearly suggests that financial conditions will need to be tightened, the number of respondents expecting higher stock prices one year from today jumped to the highest since November 2021... which incidentally is just when the market topped out during the last cycle before suffering a painful bear market.

Tyler Durden Mon, 03/11/2024 - 12:40

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Homes listed for sale in early June sell for $7,700 more

New Zillow research suggests the spring home shopping season may see a second wave this summer if mortgage rates fall
The post Homes listed for sale in…

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  • A Zillow analysis of 2023 home sales finds homes listed in the first two weeks of June sold for 2.3% more. 
  • The best time to list a home for sale is a month later than it was in 2019, likely driven by mortgage rates.
  • The best time to list can be as early as the second half of February in San Francisco, and as late as the first half of July in New York and Philadelphia. 

Spring home sellers looking to maximize their sale price may want to wait it out and list their home for sale in the first half of June. A new Zillow® analysis of 2023 sales found that homes listed in the first two weeks of June sold for 2.3% more, a $7,700 boost on a typical U.S. home.  

The best time to list consistently had been early May in the years leading up to the pandemic. The shift to June suggests mortgage rates are strongly influencing demand on top of the usual seasonality that brings buyers to the market in the spring. This home-shopping season is poised to follow a similar pattern as that in 2023, with the potential for a second wave if the Federal Reserve lowers interest rates midyear or later. 

The 2.3% sale price premium registered last June followed the first spring in more than 15 years with mortgage rates over 6% on a 30-year fixed-rate loan. The high rates put home buyers on the back foot, and as rates continued upward through May, they were still reassessing and less likely to bid boldly. In June, however, rates pulled back a little from 6.79% to 6.67%, which likely presented an opportunity for determined buyers heading into summer. More buyers understood their market position and could afford to transact, boosting competition and sale prices.

The old logic was that sellers could earn a premium by listing in late spring, when search activity hit its peak. Now, with persistently low inventory, mortgage rate fluctuations make their own seasonality. First-time home buyers who are on the edge of qualifying for a home loan may dip in and out of the market, depending on what’s happening with rates. It is almost certain the Federal Reserve will push back any interest-rate cuts to mid-2024 at the earliest. If mortgage rates follow, that could bring another surge of buyers later this year.

Mortgage rates have been impacting affordability and sale prices since they began rising rapidly two years ago. In 2022, sellers nationwide saw the highest sale premium when they listed their home in late March, right before rates barreled past 5% and continued climbing. 

Zillow’s research finds the best time to list can vary widely by metropolitan area. In 2023, it was as early as the second half of February in San Francisco, and as late as the first half of July in New York. Thirty of the top 35 largest metro areas saw for-sale listings command the highest sale prices between May and early July last year. 

Zillow also found a wide range in the sale price premiums associated with homes listed during those peak periods. At the hottest time of the year in San Jose, homes sold for 5.5% more, a $88,000 boost on a typical home. Meanwhile, homes in San Antonio sold for 1.9% more during that same time period.  

 

Metropolitan Area Best Time to List Price Premium Dollar Boost
United States First half of June 2.3% $7,700
New York, NY First half of July 2.4% $15,500
Los Angeles, CA First half of May 4.1% $39,300
Chicago, IL First half of June 2.8% $8,800
Dallas, TX First half of June 2.5% $9,200
Houston, TX Second half of April 2.0% $6,200
Washington, DC Second half of June 2.2% $12,700
Philadelphia, PA First half of July 2.4% $8,200
Miami, FL First half of June 2.3% $12,900
Atlanta, GA Second half of June 2.3% $8,700
Boston, MA Second half of May 3.5% $23,600
Phoenix, AZ First half of June 3.2% $14,700
San Francisco, CA Second half of February 4.2% $50,300
Riverside, CA First half of May 2.7% $15,600
Detroit, MI First half of July 3.3% $7,900
Seattle, WA First half of June 4.3% $31,500
Minneapolis, MN Second half of May 3.7% $13,400
San Diego, CA Second half of April 3.1% $29,600
Tampa, FL Second half of June 2.1% $8,000
Denver, CO Second half of May 2.9% $16,900
Baltimore, MD First half of July 2.2% $8,200
St. Louis, MO First half of June 2.9% $7,000
Orlando, FL First half of June 2.2% $8,700
Charlotte, NC Second half of May 3.0% $11,000
San Antonio, TX First half of June 1.9% $5,400
Portland, OR Second half of April 2.6% $14,300
Sacramento, CA First half of June 3.2% $17,900
Pittsburgh, PA Second half of June 2.3% $4,700
Cincinnati, OH Second half of April 2.7% $7,500
Austin, TX Second half of May 2.8% $12,600
Las Vegas, NV First half of June 3.4% $14,600
Kansas City, MO Second half of May 2.5% $7,300
Columbus, OH Second half of June 3.3% $10,400
Indianapolis, IN First half of July 3.0% $8,100
Cleveland, OH First half of July  3.4% $7,400
San Jose, CA First half of June 5.5% $88,400

 

The post Homes listed for sale in early June sell for $7,700 more appeared first on Zillow Research.

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