Quiet Week Brought News of Home Appreciation, Tame Inflation

After some big labor market reports were released on July 2 and the fireworks of July 4, last week was relatively quiet on the economic report front.

Initial Jobless Claims Beat Expectations

The latest weekly initial jobless claims showed that another 1.314 million people filed for unemployment benefits for the first time during the week ending July 4. This was slightly better than expectations of 1.4 million claims. California (+267K), Texas (+117K) and Georgia (+103K) reported the largest gains.

Continuing Claims finally saw a big improvement, falling from 18.76 million to 18.06 million, which is the first meaningful improvement we have seen in quite some time.

If we factor in the amount of new and continuing claims and the number of people in the labor force, we estimate that the real-time unemployment rate is around 14%. This rate would be about 3% higher, or 17%, without the estimated number of temporary new jobs created by the Paycheck Protection Program.

The Latest Home Appreciation Forecasts

CoreLogic's Home Price Index Appreciation report for May showed that home
prices rose 0.7% from April to May. Home prices were also up 4.8% when compared to May of last year. This is a decline from the year-over-year reading of 5.4% appreciation in April's report. Washington (5.0%), San Diego (4.9%) and Las Vegas (4.8%) led the gains.

CoreLogic forecasts that home prices will drop 0.1% from May to June, and they expect prices to fall 6.6% from May 2020 to May 2021. Their annual forecast dropped significantly from their previous prediction of a 1.3% decline.

Dr. Frank Nothaft, Chief Economist for CoreLogic, said, “Pending sales and home-purchase loan applications are higher than in June of last year and reflect the buying activity of millennials. By the end of summer, buying will slacken and we expect home prices will show declines in metro areas that have been especially hard hit by the recession.”

CoreLogic also noted that a lot of the demand was pent up from spring to summer with elevated unemployment, and that purchase activity and home prices could fall off once summer ends.

It remains to be seen if this latest forecast will prove true, or if the surge in sales and appreciation levels off less steeply, which could still allow for home price gains over the next year.

Wholesale Inflation Lower Than Expected

The Producer Price Index, which measures inflation on the wholesale level, was down 0.2% in June after rebounding in May. The reading was much lower than expectations of a 0.4% rise. PPI also declined 0.8% on an annual basis, which was unchanged from May's annual reading.

The core rate, which strips out volatile food and energy prices, was down 0.3% from May to June, which was also much lower than expectations of a 0.2% gain. Year over year, core PPI was up 0.1%.

The bottom line is that the ongoing pandemic continues to depress demand. There is no wholesale inflation, which will certainly not result in consumer inflation. This is one of the reasons we have seen Mortgage Bonds on such a nice move higher.

Remember, inflation reduces the value of fixed investments like Mortgage Bonds. And since home loan rates are tied to Mortgage Bonds, when Bonds improve, home loan rates can as well.