I am asked every day where I think that home prices are headed. The short answer is “up”.  Over the last 40 years, home prices have continued to appreciate at an average of 4.02% in the state of Utah. We are already beating the expected 2.89% appreciation rate this year, which will burst the expected 18.15% five-year gain wide open.  The rising cost of homes is due in part to the declining number of homes available for sale.  Even with the abundant number of new homes being constructed, inventory is down 16% from this time last year.  That whole supply and demand thing is proven true time and time again.

In 1961, Mark Rothko painted “Orange, Red, Yellow”, pictured here.  In 2012 this piece rocked the art world by selling for over $86.9 million, which was a was a record for a post-war painting.  Unfortunately, Mr. Rothko was long gone by the time the gavel dropped at the Christie’s auction–there aren’t too many dudes that live to 109 these days.  As there was only one of Orange, Red, Yellow, that limited supply drove the price of the piece up over the years to a value unattainable by most people.  Fortunately for you and me, home prices are a little less crazy–and a little easier to understand.

The FHFA House Price Index rose 0.6% from last month to an annualized 6.2% appreciation rate.  This index measures the price expansion of single family homes with conforming conventional mortgages on them.  Existing Home Sales were down 2.3% last month, but where April was the best reading in the last 10 years, even a slight retraction is still reflecting a very strong market.

The next FOMC meeting is on the 13-14th of June.  For the past few months, folks have been speculating that the Fed will raise rates at that time.  In the last few days though, several pundits have pointed to a few factors indicating that the growth has slowed and that rates should not be increasing.  Making counterclaims is what keeps cable news channels on the air, but until the data hits it’s all speculation.  Today at about noon our time we’ll see the minutes from the last FOMC meeting, and that may shed some light on the behind-the-scenes discussion happening among those who hold the future of interest rates in their collective hands

President Trump has committed to reduce government spending by 3.6 trillion dollars over the next ten years.  That’s a pretty bold commitment considering the President’s term is only for four years.  As the June Fed meeting approaches, we anticipate the overnight rate to jump up another 0.25%.  While that does not directly impact a 30 year mortgage loan rate, the Fed does have a large trump card (no relation to the CEO of the U.S.) that it can play to regulate longer-term rates.  By beginning to sell some of their two-plus trillion dollars in mortgages, the Fed can drive prices down and rates higher on 15 and 30 year loans, keeping the yield curve looking normal and healthy.

All the finger pointing in Washington yesterday created concern among traders.  Stocks dropped a few percentage points and Bonds benefited almost 50 bps.  Mortgage Bonds are giving some of that back today after the Philly Fed Business Outlook showed a sentiment reflecting almost double the amount of positive vibes this month compared to last month.  Also, the number of folks continuing to receive unemployment compensation fell 22,000 to 1.9 million.  While still a staggering number to me, it’s the fewest number on Americans to receive Unemployment in the last 29 years.

Housing Starts declined 2.6% last month and Building Permits are down 2.5%.  Only 1.172 million front doors were installed on new residences in the last year–well below expectations.  A fully thriving housing industry is expected to average 1.5 million newly constructed edifices per year going forward.  With all the new projects underway, is feels like new construction should be registering a 30-40% growth rate. Actually, the breakdown shows that single-family homes are up 8.9% from this time last year, while multi-family projects have declined 15.1%.  Multi-unit dwellings account for about 30% of new housing, so overall, Starts are up 0.7% from last April.  Interestingly, numbers nerds have found that each single-family home contributes on average, about twice the amount to our nation’s GDP as a dwelling in a multi-unit building.

In related news, Fannie Mae said this morning that the tight supply of homes for sale continues to act as both a boon to home prices and an impediment to affordability.  Thank you, Captain Obvious.  

Mother’s Day is this weekend, and since you all have a mom, I thought that this would be a nice public service reminder.  Information released this morning shows that your Mother’s Day gift is going to cost 2.2% more than it did last year, unless you are buying mom a car.  In that case it’ll set you back 3.6% more.  Add in the rising cost of fuel and insurance and you are better off gifting Mom this classy mug.  There’s a positive message on it, and a flower.

Just like Mom with her new mug, interest rates are pretty happy this morning.  Despite upward pressures for the last month, the relatively low inflation numbers have put a spring in the step of Bond traders, who are pushing for lower interest rates.  It’s another gift that just keeps on giving.   

Mortgage pricing slipped under the 100 day moving average yesterday.  The last time that happened was October 5, and rates moved up about 1/4% over the next six weeks.  Pricing has declined again this morning.  Although we look at the technical picture only in the absence of “real” news (as opposed to “fake news”), movements like today have a marked impact on direction of interest rates.  Evidence of economic growth (or at least the hope for growth) will be required to see interest rates move meaningfully higher from here.  Such proof typically comes slowly over time.  Here is today’s data:

The Producer Price Index rose 0.5% last month, to a year-over-year increase of 2.5%.  Increased manufacturer’s costs do not always lead to increased consumer costs, but we’ll get that number tomorrow.  Also, Initial Jobless Claims were reported at 236,000; a slight drop from last week’s 238,000.  The employment picture keeps getting better.

The 39 page Jobs Report released today by the Bureau of Labor showed many, many boring graphs and charts.  It also showed that the Unemployment Rate dropped to 4.4%, which is the lowest finding in a decade.  Ironically, the Labor Force Participation Rate is also at a 10 year low 62.9%, meaning that even though folks aren’t claiming to be “unemployed”, fewer Americans are working now than at any time since 2007.  Less demand for jobs means that employers need to pay more to keep their talent, consequently, wages rose 2.5% from this time last year to a cushy $26.19 per hour.  Some talking calculators say that an economy in recovery should be experiencing a 3-4% annual wage growth.  Where some surmise that economic growth trails wage increases by several years, we might conclude that we are still a ways away from any real threat of widespread inflation.

A little bit of Cinco de Mayo trivia: Foreign-born workers account for 17% of the total workforce in the United States, and 50% of those in this demographic came into this world in Mexico.  If you think that 7.5% is a big population, consider that the state of California by itself accounts of almost 13% of the total population of the United States. Just a bit of trivial information, that’s all. 

Yesterday the Fed left interest rates in place.  Ironically, this puts upward pressure on mortgage bonds.  The 10 Year has risen to 2.36% this morning, the highest in a month.  The Fed commented that although GDP for the first quarter was only 0.7%, they have reason to believe that the second quarter will produce a 4.3% expansion rate.  That would net the growth for the year above the 2.0% target rate, and poise the economy for the two further rate hikes promised.

Tomorrow is the Jobs Report.  Like the expectation on GDP, last month’s measly 98,000 is anticipated to flourish to 180,000 new jobs created this month.  The Unemployment Rate is also expected to drop to 4.6%.  See you tomorrow!     

Today is Fed Day, but because nobody thinks that the FOMC meeting will have an impact on the markets, you have to dig pretty deep in any news source to even find mention of the meeting. In the post meeting read statement, we’ll look for insight as to when they might start to sell off their $4.5 trillion in assets.  That news could prove inflationary, which would lead to higher interest rates.  In the last decade, inflation has been about as threatening as these two cute little ducklings.