Smart Financial Decisions for You and Your Clients

John Smith
January 1, 2023
5 min read

By Megan Anderson, Vice President Public Relations

Buying a home is one of the biggest financial decisions people make, and it can also be one of the smartest. But with home prices and mortgage rates rising, and home inventory at record lows, many potential homebuyers can get discouraged – especially when the media reports that doom and gloom is ahead for housing.

But while there are some challenges to buying a home right now, the opportunity is still well worth the effort. Many housing experts are forecasting continued home price appreciation this year and beyond.

Knowing how various economic reports and other factors can impact the markets is one of the smartest financial decisions you can make today. This knowledge can help you become a better advisor, increase your level of conversion and land new referral relationships.

In this article, we’ll discuss some of the most important economic reports and data you need to understand each month, so you can share this critical information with your clients and help them make smart financial decisions for their family.

Home loan rates are inversely tied to a type of Bond called Mortgage Backed Securities, also known as Mortgage Bonds. When Mortgage Bonds improve or move higher, home loan rates decline. And when Mortgage Bonds worsen or move lower, home loan rates can rise.

Inflation is the archenemy of fixed investments like Mortgage Bonds because it reduces their value. Bonds pay investors a fixed rate of return over time. Inflation erodes the buying power of your future fixed return because the cost of goods and services has increased. Meaning that fixed amount received will purchase less in the future.

For example, let's say you lend someone $100,000 at 4%. Your fixed rate interest only payment is $4,000 per year. Today that $4,000 can purchase a shopping list of goods and services. But over time, prices rise due to inflation so you can’t purchase all of the items on the shopping list with that same fixed amount received. If inflation were to accelerate, the only protection investors have is to increase interest rates so that they receive a larger fixed payment in order to offset the more rapid erosion of their buying power.

If inflation is rising, Mortgage Bond investors must be compensated with a higher rate of return to combat the erosion of the Bond’s fixed payment, causing home loan rates to rise. As a result, inflation reports are followed closely, as they can have a big impact on Mortgage Bonds and the home loan rates tied to them.

There are two main reports that measure inflation at the consumer level: the Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE), the latter of which is the Fed’s more favored measure of inflation. These reports have several important similarities, as well as some crucial differences.

CPI measures prices on a fixed basket of goods and has a significant weighting towards housing and out of pocket medical expenses. PCE measures prices on a basket of goods but allows for substitutions. These substitutions will be for similar products. An example of this could be the substitution of honeydew melons for cantaloupe melons if the price of one were to rapidly increase due to supply issues. PCE tries to act like a smart shopper would.

Unlike CPI, PCE does not have a big weighting towards housing, which is obviously important, as well as out of pocket medical expenses. Instead, PCE focuses on Medicare and Medicaid expenses, which are kept by the government. As a result, PCE can underestimate the real inflation a consumer feels and it typically runs softer or cooler than CPI due to these factors.

Inflation has risen sharply this past year, which consumers have noticed as everyday prices of food, gas and other items have moved higher. February’s Consumer Price Index that was released on March 10 showed that inflation is at 7.9%, which is the hottest reading since 1982, when it was at 8.4%. This is a big reason why mortgage rates have moved higher. Keeping an eye on this data can help you explain what’s happening in the markets to your clients.

Rising inflation is a big reason why the Fed’s actions remain crucial to monitor in the months to come, as they will play an important role in the direction of the markets and mortgage rates this year.

Note that the Fed has two levers they can pull for tightening the economy – hiking their benchmark Fed Funds Rate and reducing their balance sheet. The Fed Funds Rate is the interest rate for overnight borrowing for banks and it is not the same as mortgage rates.

Hiking the Fed Funds Rate will actually be a good thing for mortgage rates, as the Fed curbs inflation and preserves the fixed return a longer data Bond provides. However, reducing their balance sheet (which means allowing Bonds to fall off their balance sheet and no longer reinvesting in them each month) would cause more supply on the market that has to be absorbed. This can cause mortgage rates to move higher.

At their March meeting, the Fed as expected raised the Fed Funds Rate by 0.25%. They also said they expect to reduce their balance sheet at an unspecified future meeting.

The bottom line is that we will want to closely watch how the Fed tries to walk the tightrope of hiking and allowing a balance sheet runoff during 2022.

Understanding housing reports is vital, especially because the media often gets this data wrong, which can lead to fear or hesitancy among your clients.

Existing Home Sales is especially important because it measure closings on existing homes and represents currently about 90% of the housing market. This report comes out monthly from the National Association of Realtors and likely shows buyers in the previous two months, since it measures closings of existing single-family homes during the month and not contracts.

One piece of data within this report that is often misinterpreted by the media is the median home price. The median home price is not the same as appreciation. It simply means that in this measured time period, half the homes sold above this value and half below. Given that housing nationwide is especially tight for lower-priced homes, it makes sense that the median home price has increased.

In addition, January’s report showed that inventory is at a record low 1.6 months’ supply, whereas a 6 months’ supply is more reflective of a healthy housing market. Considering the lack of inventory we have, the pace of sales is actually keeping up quite well – but the media will not tell your clients this.

Appreciation reports, unlike the median home price, give us a reading on how home values are performing. These are very important to not only understand, but also to be able to articulate to your clients.

The Case-Shiller Home Price Index is considered the gold standard of appreciation reports and tracks monthly changes in the value of residential real estate. This report is a bit behind, as it is on a 2-month delay. It is based on resales of single-family homes, while co-ops, condominiums, and new construction are excluded. There is a national index and a 20-city composite index that are most widely watched. This report will give both a monthly and an annual appreciation figure.

You can use this data to explain the power of appreciation. For example, if we saw 8% appreciation on a $400,000 home, your clients would gain $32,000 over the next 12 months in appreciation alone. Remember, buying a home is a financial decision – and knowing this information can help you show your clients the financial opportunity.

There are two main employment reports that are issued each month: the ADP Employment Report and the BLS Jobs Report. These reports measure the most important aspect of the economy: the health of the labor market. They also tell us the rate of job growth or loss, the unemployment rate, and the change in wages.

The ADP Employment Report is a monthly report from Moody’s Analytics that tracks private employment in the US (does not include government jobs). It is based on anonymous and aggregated data derived from nearly 460,000 US companies and approximately 26 million private sector US workers. This report is typically released on the first Wednesday of every month and is viewed as a useful preview to the more detailed Bureau of Labor Statistics (BLS) Jobs Report. ADP can have an impact on the markets, but oftentimes is overshadowed by the more important BLS report that follows two days later.

The Bureau of Labor Statistics (BLS) Jobs Report is a monthly report that typically comes out the first Friday of each month. It summarizes total non-farm payroll employment in the United States by surveying businesses and households. The BLS Jobs Report is comprised of two surveys to monitor the labor market: The Establishment or Business Survey (Current Employment Statistics – CES) and The Household Survey (Current Population Survey – CPS).

The Establishment Survey (Business Survey) outlines the headline job creation number and employees paid during the sample week - the week that encompasses the twelfth of the month. It also takes into account the birth/death ratio, which tracks the number of new companies created (born) versus companies that close (die).

The Household Survey is collected through phone calls and visits made to approximately 60,000 households during the sample week. Since the US has over 124 million households, each call represents over 2,000 households. The Household Survey also reports on the rate of unemployment. This is calculated by dividing the number of unemployed individuals into the total labor force.

Monitoring these reports matters because when business is good, companies will be hiring, which can have a big impact on housing. The opposite is also true. When we see decreased job growth or people are fearful about their employment situation, the last thing they will be thinking about is purchasing a home.

As jobs go, so does the economy.

When I first started at MBS Highway, and still to this day, I spent hours of my day studying and learning the market. But it wasn’t until I took our Certified Mortgage Advisor course that I really began to understand why it’s so important to have this information.

CMA teaches you about economic and housing reports, candlestick patterns, recession indicators and how to use mortgage debt to create sustainable lifelong wealth for your clients. This course empowers you to step away from being a salesperson so you can step into being an advisor for your clients. This knowledge has made a powerful difference in my life and my career, which is why I’d like to offer you an exclusive $400 discount for this course. Simply use the code VISION upon sign up.

After all, investing in yourself today is the smartest financial decision you can make for your future success.

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