Week Ahead on Wall Street: Mortgage Hopes

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Homeownership and the American Dream

The Federal Reserve finally did it. It lowered its key interest rate. It kicked off this  cutting cycle with a bang, delivering a larger-than-usual 50 basis point cut. 

Before you rush to check the latest mortgage rates and get confused as to why they haven’t yet fallen by half a percentage point overnight, remember that mortgage rates are determined by multiple factors. Sure, there is the federal funds rate (the Fed’s key interest rate), but they’re also driven by investor expectations for rates over a longer period of time. The best benchmarks to follow for insight into mortgage rates are Treasury yields between the 7 and 10-year maturities, which follow similar drivers; and those yields actually have risen since the Fed cut. (This might seem counterintuitive, but Fed Chair Jerome Powell suggested that the neutral rate of interest is likely much higher than it was before the pandemic. That pushed investors’ longer-term interest rate expectations, and as a result Treasury yields, higher.)

For hopeful homebuyers, that can be frustrating, but it’s worth remembering that the average 30-year fixed mortgage rate has already come down from its peak. Some investors expect this trend will continue as the Fed normalizes interest rates (barring some unforeseen spike in Treasury yields). 

But other data related to the housing market paints a more nuanced picture. Housing starts and building permits are at multi-year lows. That’s a problem given the U.S. is in the midst of a structural housing shortage to the tune of millions of homes.

On the other hand, mortgage applications have increased notably of late, with purchase applications up over 10% since the end of July and refinancing applications up a whopping 65%. If those mortgage trends continue, we could see home sales and new constructions pick up. Next week brings a partial update, with data on new home sales, housing prices, mortgage activity and consumer confidence set to be released.

Will the housing market return to the frenetic pace of 2020-21 when average mortgage rates were below 3% and home prices were rising 1-2% every month? Probably not. But an environment where mortgage rates fall into the 5% range and home price appreciation continues at a more moderate pace? That doesn’t seem so unreasonable.

As a result, Fed officials could indicate more interest rate cuts than they did during the last release of projections, where the median official expected one cut in 2024 and four cuts in 2025. 

Investors currently expect four or five cuts in 2024, which means that they expect at least one larger 50 basis point cut considering there are only three Fed meetings left in the year. Next year, they expect five or six more cuts. If these expectations are met remains to be seen.

Economic and Earnings Calendar

Monday

• August Chicago Fed National Activity Index: This is a monthly index put together that incorporates 85 indicators from four categories: production and income; employment, unemployment, and hours; personal consumption and housing; and sales, orders, and inventories. 
• September S&P Global US PMIs: These indexes track how purchasing managers across different industries feel about the business environment.
• Fedspeak: Atlanta Fed President Raphael Bostic will speak about the economic outlook. Chicago Fed President Austan Goolsbee will participate in a fireside chat on monetary policy and the economy. MInneapolis Fed President Neel Kashkari will participate in a Q&A on the economic impact of early childhood education.

Tuesday

• September Philadelphia Fed Non-Manufacturing Activity: The Philadelphia Fed’s survey of services executives in the region on business conditions and their outlook. 
• July FHFA House Price Index: This is a broad measure of single-family house prices released by the Federal Housing Finance Agency. 
• July S&P CoreLogic Case-Shiller Home Price Index: This is a private sector measure of national home prices. After a period of slight decline in the second half of 2022 and early 2023, the index returned to growth and is now at record highs. 
• September Conference Board Consumer Confidence: How consumers feel about economic conditions affect their spending habits. This survey places a particular focus on job availability and the state of the labor market. 
• September Richmond Fed Manufacturing Activity: The Richmond Fed’s survey of manufacturing executives in the region on business conditions and their outlook. 
• September Richmond Fed Non-Manufacturing Activity: The Richmond Fed’s survey of services executives in the region on business conditions and their outlook.
• Earnings: AutoZone (AZO)

Wednesday

• August New Home Sales: While only a minority of home transactions in any given month come from new constructions, these home prices tend to be more cyclical and give insight into developing trends.
• Weekly Mortgage Applications: Mortgage activity gives insight on demand conditions in the housing market.
• Earnings: Cintas (CTAS), Micron Technology (MU)

Thursday

• 2Q GDP Third Estimate: The primary measure of economic activity in the United States, which is measured as total expenditure on a country’s goods and services. 
• August Factory and Durable Goods Orders: These metrics give insight into underlying trends for leading cyclical indicators. 
• September Kansas City Fed Manufacturing Activity: The Kansas City Fed’s survey of manufacturing executives in the region on business conditions and their outlook.
• Weekly Jobless Claims: This high frequency labor market data gives insight into filings for unemployment benefits. Jobless claims have continued to show a labor market that remains strong despite having cooled.
• Fedspeak: Boston Fed President Susan Collins and Fed Governor Adriana Kugler will participate in a discussion on the intersection between bank supervision and financial inclusion. Fed Chair Jerome Powell will deliver pre-recorded opening remarks at the 10th annual US Treasury Market Conference. New York Fed President John Williams will speak at the 10th annual US Treasury Market Conference. Fed Vice Chair for Supervision Michael Barr will speak at the 10th annual US Treasury Market Conference. Minneapolis Fed President Neel Kashkari and Fed Vice Chair for Supervision Michael barr will discuss the relationship between bank supervision and inclusive lending.
• Earnings: Accenture (ACN), Costco (COST), Jabil (JBL), CarMax (KMX)

Friday

• August Personal Income and Spending: These numbers give insight into how Americans are doing, which is important since consumer spending accounts for about two-thirds of economic growth in the United States. 
• August Wholesale Inventories and Sales: Wholesalers often operate as an intermediary between manufacturers and retailers, serving as a key part of the goods supply chain. 
• August Personal Consumption Expenditures Price Index: The Fed targets this inflation measure for its price stability mandate and believes PCE to be the best measure of consumers’ spending habits. 
• August Wholesale and Retail Inventories: Wholesalers and retailers often operate as intermediaries for the sale of manufactured products, serving as a key part of the goods supply chain. 
• September University of Michigan Consumer Sentiment: How consumers feel about economic conditions affect their spending habits. This survey places a particular focus on inflation and its trajectory. 
• September Kansas City Fed Non-Manufacturing Activity: The Kansas City Fed’s survey of services executives in the region on business conditions and their outlook.
• Fedspeak: Boston Fed President Susan Collins and Fed Governor Adriana Kugler will meet with small business and community leaders in a series of meetings.

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