July 15, 2024 – Latest inflation data continued to provide hopes that the Fed could begin cutting rates in the near term. The financial market has been reacting positively to the good news and consequently led to mortgage rates dropping more than 30 basis points since early July. With rates trending down in recent weeks, the housing market is seeing more buyers and sellers reentering the market. The momentum could continue if rates begin declining more consistently, and July could become the turning point for a strong second half for the housing market.

Inflation reaches the lowest level in more than three years: A drop in energy prices and a modest increase in food prices led to the first monthly decline in the consumer price index (CPI) since May 2020. The June headline CPI declined 0.1% from the prior month and was up 3% from the same month last year. Excluding energy and food prices, the core CPI rose 0.1% from May and 3.3% from a year ago. Both measures exceeded expectations and recorded the smallest gains since more than three years ago. The slowdown in inflation was broad-based, with core goods prices down once again while core services prices up only 0.1%. The latest inflation data could be one of the most encouraging reports since the Fed first started fighting inflation and might have put the central bank one step closer to reducing the fed funds rate in its September FOMC meeting.     

Consumers lower expectation for inflation and home price growth: Consumers expectations on inflation a year from now dipped at the short- and the long-term horizons in June, but up slightly at the medium-term horizon, according to the latest New York Fed’s Survey of Consumer Expectations. At both the one-year horizon and the five-year horizon, the median inflation expectation recorded a 0.2 percentage point drop from the prior month to 3.0% and 2.8%, respectively. On the other hand, the median three-year ahead inflation expectation gained 0.1 percentage points to 2.9% last month. Consumers also expected home price growth to soften in the next 12 months, with the year-over-year change in price projected to decline to 3.0% in June from 3.3% recorded in May. As interest rates are expected to decline gradually in the next 18 months and housing supply is likely to continue loosening up this year and next year, home prices will continue to grow but at a more moderate pace in 2025.

Mortgage rates reach the lowest level since February: Weaker jobs reports and cooler-than expected inflation data in the past couple of weeks continued to fuel speculations that the first Fed’s rate cut is getting closer and closer as the economy moved into the second half of the year. Interest rates have been declining since the beginning of July and its winning streak had been extended to eighth straight day as of July 15, according to Mortgage News Daily. At 6.81%, the average 30 year Fixed-Rate Mortgage (FRM) reached the lowest level in five months in the mid of July. While the underlying bond market is beginning to exhibit signs of pulling back and rates could inch back up in the coming days, rates could begin declining in a sustainable fashionable if more signals of economic weakness are being observed in the third quarter.  

Small business optimism inches up but Main Street remains pessimistic: The sentiment of small business owners improved slightly last month, but their outlook remained dim as the economic momentum slowed down. The NFIB Small Business Optimism Index climbed again for the third consecutive month from 90.5 in May to 91.5 in June. While the index has reached the highest level of the year, uncertainty about the economic outlook and the presidential election continued to weigh heavily on smaller firms and kept the index below its 50-year average of 98. Inflation remained the top concern for small business owners, as 21% of them reported inflation as the single most important problem in operating their business. Weakening demand in sales activity was also evident in the latest figures, as the net percent of business owners who reported greater sales in the past three months declined compared to last year’s level and the measure had been down year-over-year every month this year. Higher interest rates and retreating labor demand were also contributing factors to the pessimism despite the latest improvement.

U.S. foreclosures down in the first half of 2024: Foreclosure filings on U.S. properties decreased in the first half of 2024 to 177,431, a decline of 4.4% from the same time period a year ago and a drop of 40.1% from the first six month in 2019, according to ATTOM. Foreclosure activity in the first half of this year was also well below the Great Recession level, with filings in 2024 down 89.2% from the peak of 1.65 million in 2010. The 177k plus properties with foreclosure filings represented 0.13% of all U.S. housing units, unchanged from the level recorded in in 2023, but a dip from 0.22% in 2019. For the month of June, 18,574 properties in the U.S. started the foreclosure process, a drop of 17% from the prior month, and a decline of 22.7% from the same month in 2023. Nationwide, one in every 5,071 properties had a foreclosure filing last month. At the state level, California had 19,013 foreclosure filings in the first six months in 2024, an increase of 6.13% from 17,914 reported in 2023. With home prices reaching record-high levels in the first half of 2024 and the labor market remaining solid this year, foreclosure activity is not expected to increase sharply in the next 12 months.

Note: The weekly market minute report is updated every Monday by 6:00 PM PST.