Review of Economic Data Released in May 2018 that Affects the Mortgage Industry

Economic Data and Indicators Every Mortgage Professional Should Follow – May 2018

I am always amazed at how events thousands of miles away can effect the Mortgage Business here at

home. If you haven’t heard the term “Ita-leave” yet, you soon will. Just like “Brexit” means “Britain exiting” the EU, “Ita-leave” means “Italy leaving” the EU. Turmoil in Italian and Spanish politics have renewed fears of countries leaving the European Union. The 5 largest Economies in the EU are

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Germany, Britain, France, Italy, and Spain. If 3 of those 5 largest Economies decide to leave the EU – the whole thing could break up. Turmoil in the EU makes the risk markets very nervous. When the risk markets get nervous they look for a safe place to park their money – like the US. This “flight to quality” lowers interest rates here at home. So when Italian politicians get into a spat – home buyers in the US can afford a larger mortgage because US interest rates are lower. (Update: Turmoil in Italy has subsided as they were able to form a political coalition. Now politics in Spain has  flared up). Let’s do a quick review of other Key Economic Indicators and Data from May 2018 that are important to the Mortgage Industry and Mortgage Professionals.

 

May Economic Data and Events May 2018

  • The May FOMC Meeting ended with the Fed leaving interest rates unchanged.
  • Fed Watchers are 99.99% expecting the Fed to raise interest rates after the June FOMC Meeting.
  • The Unemployment Rate dropped to 3.8% – the lowest since 2000 and tied with 1969.
  • Consumer Confidence is at 128.0 – the highest in 17 years.
  • The 10 Year Treasury Security yield fell below 3.0% due to a flight to quality.

 

Interest Rates and Fed Watch- May 2018 

The Fed left interest rates unchanged after the May 2nd FOMC Meeting. The latest Fed Minutes showed the Fed is watching oil prices, trade policy, the yield curve, and focused on a “sustained” 2.0% Inflation rate. But the recent turmoil in European politics may have the Fed re-thinking its interest rate policy for the last half of 2018. The issues in Europe have created a flight to quality as money is flowing into the US. Demand for US dollars means lower interest rates. Last month the yield on the 10 year Treasury Security bounced off a low of 2.69% as the dollar strengthened. The Next FOMC Meeting is June 12th and 13th. Currently, the probability of a rate hike in June is running at 99.99%.

222 Fed Target

  • Inflation                       2.5% CPI for the last 12 months
  • Wage Growth              2.7% for the last 12 months
  • GDP Growth               2.8% annualized rate for the last 12 months

 

Housing Market Economic Data and Events May 2018

There is a lot of red in the Housing Market Data and it’s due to lack of inventory. As everyone in the Mortgage Business knows, this has been an ongoing problem for the past 2 years. If you take a deeper dive into some of last months data, you’ll notice that 57% of Existing Homes were on the market less than 30 days. I have heard of many instances of bidding wars for a property as soon as it’s listed for sale. Why aren’t more people putting their homes up for sale? A lot of theories abound but one seems to stand out – many home owners are “locked-in” with a low interest rate. If they buy a home and move, it would mean getting a new mortgage with a higher interest rate, so they just stay put. The silver lining to this cloud: this is good news for the Rehab Business. When people stay in their homes longer, they typically spend money fixing them up. Herein lies an opportunity for Mortgage Lenders: Equity Lines and 2nd Mortgages are often required to finance the repairs.

 

Economic Indicators for the Housing Market Released in May 2018

  • Existing Home Sales (closed deals in April) fell 2.5% to an annual rate of 5,460,000 homes, now down 1.4% in the last 12 months. The median price for all types of homes is now $257,900 – up 5.3% from a year ago. The median Single Family Home price is $259,900 and $242,500 for a condo. First Time Buyers were 33%, Investors 15%, Cash Buyers 21%. Homes were on the market an average of 26 days, and 57% were on the market for less than a month. Currently, 1,800,000 homes are for sale – down 6.3% from a year ago.
  • New Home Sales (signed contracts in April) fell 1.5% to a seasonally adjusted annual rate of 662,000 units. Year over year New Home Sales are up 8.4%.The median price of a new home is $312,400, and the average sales price is $407,300. Inventory of New Homes for sale is 300,000 – a 5.4 month supply.
  • Pending Home Sales Index (signed contracts in April) fell 1.3% to 106.4 from 107.6.
  • Housing Starts (excavation began in April) fell 3.7% to a seasonally adjusted annual rate of 1,287,000 units – now up 10.5% YoY. Single Family Housing Starts rose 0.1% to an annual pace of 894,000 units – up 7.2% YoY. Multifamily Starts fell 12.6% to 374,000 units.
  • Building Permits (issued in April) fell 1.8% to an annual rate of 1,352,000. Single Family permits rose 0.9% to 859,000 units, and Multifamily permits fell 7.2% to 450,000 units.
  • New Home Sales, Housing Starts, and Building Permits are notoriously volatile indicators. They carry a lot of statistical uncertainty from constant revisions, changes to the seasonal adjustment formula, and are heavily influenced by weather.
  • S&P/Case-Shiller Home Price Index rose 0.3% in March. The 20 City Composite index is up 6.8% in the last 12 months.
  • FHFA Home Price Index rose 1.7% in the 1st quarter of 2018, now up 6.9% year over year.

 

Labor Market Economic Indicators and Data May 2018

The Jobs Report showed the Economy added 223,000 new jobs in May after adding 164,000 new jobs during April. These are two solid back to back reports for a healthy Labor Market. However, there are some interesting quirks in the data. An interesting part of this data was a decrease in the Unemployment Rate AND the Labor Force Participation Rate at the same time. Usually when the Unemployment Rate goes down, the Participation Rate goes up. The Unemployment Rate is at an 18 year low but it may not be due to new job creation. It’s low because many working age people are not in the labor force. As a rough measure, the labor force has been shrinking at the rate of about 100,000 per month. A deeper dive into the data shows that the Participation Rate for older workers actually increased while the Participation Rate for younger workers decreased. This is unexpected, meaning not as many Baby Boomers are retiring as you would expect, and many Millennials are not entering the labor force. Many older workers are staying on their jobs longer because they need health insurance and/or they didn’t save enough for retirement. These are interesting statistics that have ramifications for Mortgage Lenders – especially those that offer Reverse Mortgages and 1st Time Buyer Programs.

  • The Economy added 164,000 new jobs in April and 223,000 in May.
  • The Unemployment Rate fell to 3.8% in May after falling to 3.9% in April – the lowest since April 2000.
  • The Labor Force Participation Rate fell to 62.7% in May after falling to 62.8% in April.
  • The Average Hourly Wage rose 0.3% in May after rising 0.1% in April, up 2.7% in the last 12 months.

 

Inflation Economic Indicators and Data May 2018

Inflation data was consistent with expectations as the CPI and PPI both rose. Much of the increase can be attributed to rising energy prices. The Fed is closely watching Inflation and is committed to keeping Inflation in their target range. What was up and down? Energy prices up 1.4%, gasoline up 3.0%, housing up 0.3%, medial care up 0.2%, food and beverages up 0.3%, transportation services down 0.4%, recreation down 0.4%.

  • CPI rose 0.2%, now up 2.5% in the last 12 months.
  • Core CPI (ex-food & energy) rose 0.1%, now up 2.1% in the last 12 months.
  • PPI rose 0.1%, now up 2.6% in the last 12 months.
  • Core PPI (ex-food & energy) rose 0.2%, up 2.3% in the last 12 months.

 

GDP Economic Data May 2018

The 2nd guesstimate for 1st Quarter 2018 GDP showed the Economy grew at a 2.2% annualized rate. This is down slightly from the 1st guesstimate of 2.3%. The drop in GDP was attributed to low inventories and imports. However, fixed investments, consumer spending, and government spending increased. Economists still expect that the tax cuts will boost the Economy in the second half of the year. They are still predicting GDP growth for 2018 to hit 3.0%. The Year-over-Year (YoY) GDP growth in the last 12 months clocked in at 2.8%. Still very strong data for US GDP. Remember that each quarter has 3 revisions for GDP, so all the revisions are more like moving targets or guesstimates.

 

Consumer Economic Indicators and Data May 2018

It looks like the Consumer has awakened from their winter slumber as Retail Sales increased a healthy 0.3%. The first 3 months of the year are typically low for Retail Sales as the Consumer recovers from the Holiday buying binge. What were they buying? Gasoline sales was up 0.8% but most of that increase can be attributed to higher gas prices. Building materials were up 0.4% as the spring home improvement and construction season gets underway. Autos up 0.1%, furniture up 0.8%, clothing up 1.4%, restaurant & bars down 0.3%, appliances down 0.1%.

  • Retail Sales rose 0.3% in April. For the year, Retail Sales are up 4.7%.
  • PCE – Personal Consumption Expenditures rose 0.6% in April, up 4.7% year over year.
  • Consumer Confidence rose to 128.0 from a revised 25.6 – still close to a 17 year high.

 

Energy, International, and Misc Economic Data and Events

  • US – NOKO meeting (NOKO=North Korea) is back on after being cancelled – maybe???
  • Oil prices eased this month to about $74/barrel after peaking above $80.
  • Frackers have ramped up shale oil production in response to the increase in crude oil prices.
  • The EU’s highly anticipated Privacy Regulations went into effect May 25.
  • The list of Chinese goods subject to new tariffs will be released June 15th. Is this the start of a Trade War or hard ball negotiating tactics?

 

This Economic Commentary is written to be a succinct summary of the key Economic Indicators and Economic Data that influence the Mortgage and Real Estate Industries. It is written for Mortgage Professionals that need to stay current on Economic Information but don’t have hours to research and analyze Economic Data. Feel free to share this with a friend or colleague in the Mortgage or Real Estate business. If you would like this Economic Calendar and Commentary emailed to you at the beginning of each month, click here. To view or download a PDF of the June Mortgage Economic Calendar Click Here.

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Mark Paoletti, MPaoletti@MortgageElements.com

www.MortgageElements.com

 

 

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